Author: ERI

This has been quite a year for the tiny corner of the IRS tasked with overseeing tax exempt organizations. The criticism of the handling of tax-exemption applications for political groups brought more attention to the Exempt Organization (EO) division than the nonprofit sector ever thought possible – and brought down not only the top staff in charge of the division, but also the acting director of the IRS. With the recent publication of the IRS 2013–2014 Priority Guidance Plan, it appears that the efforts to reform the application process for tax exempt organizations are still the highest priority for the EO. 

Overall, the IRS lists 324 projects throughout the entire organization that are priorities for the year (July 2013 to June 2014). These activities will be worked on actively during the year, but with no deadline. The IRS states that important issues include guidance on international taxation and health care, and the implementation of legislative changes, but for the EO division, the list focuses on clarifying the regulations governing 501(c)(4) social welfare organizations and filing requirements for all exempt organizations.For example, this would include guidance on measuring a 501(c)(4) organization’s primary activity and whether it is operated primarily for the promotion of social welfare and/or political campaigns. 

Although compensation reporting was not specifically mentioned in the Plan, the EO sent a strong message in an April report about focusing its compliance efforts on the following issues:

• Reporting unrelated business income.  If there are multiple years of losses, there may be questions about the activities’ relationship to the organization’s purpose and the allocation of expenses to these activities.
• Documenting executive compensation decisions.  Appropriate comparability data must be used to set compensation. ERI’s Nonprofit Comparables Assessor gives access to the Forms 990 of similar organizations.  Check out the free demo version.
• Coordinating reporting on employment tax returns. The IRS runs a check of what’s reported for compensation on Form 990 and employment tax returns, so make sure reporting is consistent.   

Last week, the Senate Finance Committee released a 19-page paper outlining tax reform options which would affect tax exempt organizations and charitable giving. The report reviews current law and presents some possible changes in four areas: the charitable deduction, the taxation of nonprofit commercial activity, the political and lobbying activities of exempt organizations, and a final catch-all category for other tax-exempt issues.

While not endorsed by the committee, many of the ideas were from the formal comments submitted to the House Ways and Means Committee tax reform working group on charitable and exempt organizations.  This shows that the Senate and House committees are working together and lists the ideas that they have been hearing.

Entitled Tax-Exempt Organizations and Charitable Giving: Senate Finance Committee Staff Tax Reform Options for Discussion, the Senate staff first provides a good overview of current regulations affecting the nonprofit sector.  The approximately 1.5 million tax-exempt organizations currently have $2.7 trillion in assets and must meet certain standards to maintain exempt status. Most are required to file annual information returns reporting gross income, disbursements, and other information.

For organizations exempt under IRC 501(c)(3) and (c)(4), there is the possibility of an excise tax when the organization provides a closely related party with an “excess benefit,” but clearer definitions and more rigorous enforcement have been proposed by experts.  The proposals include the following:

• Tightening rules for revenue generated in coordination with for-profit partnerships;
• Replacing the current rebuttable presumption rule with a minimum due diligence requirement; and
• Requiring disclosure of compensation studies.

Changes in reporting requirements are also proposed.  Now most tax-exempt organizations must file annually with the IRS and make that document public – one exception is that organizations that have commercial business activity unrelated to their mission must file Form 990-T, which is currently not disclosed to the public.  One proposal would require tax-exempt organizations to make their Form 990-Ts public.  Other ideas are as follows:

• Requiring electronic filing for all 990 forms; and
• Creating a simpler version of Form 990 for charities with up to $1 million in gross receipts.

While these proposals are not yet supported by either of the relevant committees, this report is worth reading to gain some understanding of what might be under discussion as tax reform legislation is crafted.  In the meantime, the advice for nonprofits remains the same:

• Carefully report unrelated business income, especially if there are recurring losses, and be sure to allocate organization expenses to these activities accurately.
• Use appropriate comparability data when setting compensation, easily obtained from Forms 990 from similar organizations.  Check out ERI’s Nonprofit Comparables Assessor for easy-to-use, affordable data accepted – and in fact used – by the IRS (they hold multiple licenses).
• Report compensation accurately on employment tax returns and on Form 990 – the IRS now checks to see that these two sources match.

When a former top executive for New York University (NYU) nominated for Treasury Secretary was questioned at his confirmation hearing about his compensation (in particular, his parting bonus) and subsidized mortgages, Senator Chuck Grassley raised concerns that these payments by a nonprofit were inappropriate, considering its exemption from income and property taxes. According to a recent New York Times article, Grassley asked for more details and, several months later, has not received the detailed information he is seeking from NYU.

Questioning compensation at nonprofit universities is not new. As a member of the Senate Finance Committee, Grassley was instrumental in setting up a Commission with representatives from the nonprofit sector to examine executive compensation, among other issues. After two years of deliberations, findings were published in December 2012 (see Enhancing Accountability for the Religious and Broader Nonprofit Sector). No recommendations for new laws and regulations (with the exception of some possible guidance on when to use for-profit comparable data) were included. However, nonprofits were told that they should make use of relevant data in their compensation deliberations. Donors and funders were also told to review compensation levels and the process for setting them before committing their funds. In addition, the IRS was encouraged to step up its compliance efforts.

The IRS has also been interested in compensation at universities and recently finished some research that began with questionnaires in 2008 (see the final report from May 2013). Among the 34 private colleges that were audited, nearly 20 percent failed to follow tax rules requiring them to compare the compensation of their top employees to that of similar officials at appropriate peer institutions. Most colleges attempted to conduct such comparisons, the report says, but they relied on figures from the wrong kind of institution or did not consider whether the salary comparison included other kinds of compensation.

And therein lies the problem – the information of most interest to Grassley and, perhaps, for those seeking data for comparisons, is not public information required to be included on Form 990. While Grassley is calling for more detailed information, NYU is providing high-level aggregated data (for example, the total number and size of loans that NYU has made to faculty members and executives, but no breakout of individual loans). NYU says such arrangements are necessary to attract and retain executives and professors, and that providing information about individual loans beyond what is legally required could have an adverse impact on those involved. Currently, there seems to be an impasse, with Grassley saying that he is being stonewalled, and NYU saying that they are cooperating and providing as much detail as possible.

Whatever the outcome, those responsible for setting executive salaries for universities – and for all nonprofits – should be aware that those salaries will be reviewed for reasonableness. ERI’s Nonprofit Comparables Assessor remains the most flexible and comprehensive software to create the comparable data needed to establish what is reasonable – and it is the tool also used by the IRS to evaluate nonprofit compensation levels. A free demonstration version is available for download.

Each year, the Council on Foundations completes a survey of compensation in grant-making organizations. The most recent report on 2012 salaries includes responses from 893 organizations for over 7,600 full-time employees in 34 different positions. The data show that pay increases for foundation employees grew at a slower rate last year than they did in 2011 and 2010. The median salary for all full-time foundation employees grew 2.1% in 2012, just keeping up with the rate of inflation. The rates of increase for the two previous years were each 3%.

Other findings included the following:

• The 2012 median salary for all full-time workers at the grant-making organizations surveyed was $72,000.
• Chief executives at foundations made a median of $145,000 last year, and about 30% received bonuses in 2011.
• Program officers were paid a median of $80,936.
• The larger the organization, the more likely it was led by a male CEO – women headed 82% of foundations with assets under $5 million, but only 25% of foundations with assets of more than $750 million.

While the “2012 Grantmakers Salary and Benefits Report” may be useful to understand trends in compensation for different types of foundations, more information is necessary to document what pay should be for a specific organization, according to IRS regulations. Like other charities, boards setting compensation for their top level executives must collect data on what is being paid for similar jobs in similar circumstances. The more detailed data needed are available from ERI’s Nonprofit Comparables Assessor.

The software allows the user to easily calculate average competitive compensation levels, selecting the relevant organizations by type (foundations in this instance), geographic area, and size (asset level for foundations) so that truly similar organizations are included in the analysis. Access to the source documents for the data is only a click away, so verification is simple.

The data provided by the Nonprofit Comparables Assessor is what the IRS wants nonprofit boards to use when making compensation decisions. In fact, the IRS and various state charity regulators use this same software to aid in their determinations of what is reasonable compensation. A free demo version is available for download.

The Budget and Legislative Sub-Committee of the Pennsylvania legislature was asked to compare compensation of for-profit and nonprofit human service contractors. The resulting report, released last week, may surprise some readers.

The study looked at nonprofit and for-profit service providers “for intellectual disability consolidated (Medicaid) waiver and community-based programs, community-based mental health, child welfare, and drug and alcohol services.”  While the committee staff was tasked with making recommendations to improve these services, none were included with the report.

Here are some findings for the 662 nonprofit organizations studied, using Form 990 data:

• 317 (48%) reported no individuals receiving over $100,000 per year in reportable compensation from the filing organization, and an additional 124 (19%) reported only one such individual.
• At least 910 individuals received more than $200,000 in total compensation. Of these, 39 received more than $1 million in total compensation. All but 2 of the individuals receiving $1 million or more were associated with general acute care hospitals.
• Total compensation includes reportable compensation from the filing organization plus compensation from related organizations and certain other income, as listed in the IRS 990 instructions.
• Most (446) nonprofits had less than $10 million in assets; 47 organizations had assets of more than $100 million.

Here are some findings for the 113 for-profits providing information, with data from questionnaires and SEC filings where available:

• 74 (65%) indicated no one in their organizations received over $100,000 in compensation.
• 16 (14%) indicated only one individual received over $100,000.

So are the nonprofits really paying higher salaries to their executives?  A final caveat in the study included the statement: “Readers should be cautioned against making direct comparisons with the nonprofit organizations, however, because for-profit organizations with highly compensated employees may have been more likely to not submit questionnaires. It is also likely the for-profits did not include all the forms of compensation nonprofits are to report in the Form 990.”  The authors also note the information needs to be much more closely scrutinized before any recommendations are possible.

This study appears to be comparing apples and oranges, but at least the authors understand that direct comparisons between the nonprofit data and the for-profit data were not appropriate, so to date, fruit salad is not the result.

As usual, what people are paid depends on what they do and where they do it (the industry/subsector, and the size of the company/organization).  Appropriate pay should reflect the market, rather than focusing on an arbitrary salary level, in this case, $100,000.

Read the study, draw your own conclusions, but if you are responsible for setting salaries, collect the data that shows what comparable individuals make in entities of similar type and size.  The goal is to determine what is needed to attract and retain the executives but not to pay more than is needed.   ERI’s Nonprofit Comparables Assessor provides that information instantly.