The IRS has published Notice 2011-43, which provides transitional relief for certain small organizations that lost their tax-exempt status because they failed to file an annual electronic notice for three consecutive tax years beginning in 2007.  Qualifying organizations will be able to file for reinstatement of their tax-exempt status, retroactive to the date the status was lost, and pay a reduced filing fee of $100.

The relief applies to organizations that lost their exempt status because of their failure to comply with Sections 6033(i) and (j) of the Internal Revenue Code, which were added by the Pension Protection Act of 2006.  Section 6033(i) applies to organizations that are exempt from filing annual information returns on Form 990 or 990 EZ because their gross receipts that are normally less than $25,000 (increased to $50,000 for the 2010 tax year).   These organizations are required submit an annual electronic filing on Form 990-N, also called the e-postcard. Section 6033(j) provides that an organization’s exempt status will be revoked if it fails to file the 990-N or other required annual information return for three consecutive tax years. An organization’s annual gross receipts are “normally not more than” $25,000 or $50,000 in a taxable year if its average annual gross receipts for that taxable year and the two taxable years immediately preceding it are not more than $25,000 or $50,000, respectively.

An organization that had its tax-exempt status revoked under section 6033(j) must apply for reinstatement with the IRS, even if it was not originally required to file an application for recognition of exempt status (Form 1023).  If the organization applying for reinstatement of tax-exempt status can show reasonable cause for its failure to file, its tax-exempt status may be reinstated retroactive to the date of the automatic revocation.  Reinstatement is at the Secretary of the Treasury’s discretion, however, the IRS has set a very low bar for determining whether a small organization has established reasonable cause for its failure to file.

The IRS will treat an organization as having established reasonable cause if it meets each of the following criteria:

• The organization was not required to file Form 990 or Form 990-EZ for the taxable years beginning before 2007.

• The organization was eligible to file a Form 990-N in each of its taxable years beginning in 2007.  Organizations (other than private foundations and       most section 509(a)(3) supporting organizations) with annual gross receipts that were normally not more than $25,000 would generally have been eligible to file the Form 990-N.

• The organization submits its application for reinstatement to the IRS on or before December 31, 2012.

An organization must apply for reinstatement on the form used to apply for recognition of exempt status, even if it was not originally required to file. Thus, an organization seeking reinstatement under section 501(c)(3) would file Form 1023, and an organization seeking reinstatement under section 501(c)(4) would file Form 1024.  The organization must write “Notice 2011-43” on the top of the form and on the envelope in which it is mailed.  The organization must also attach the following statement to its application:

[Name of Organization] was not required to file annual information returns for taxable years beginning before 2007; was eligible in each of its taxable years beginning in 2007, 2008 and 2009 to file a Form 990-N e-Postcard; and had annual gross receipts of normally not more than $25,000 in each of its taxable years beginning in 2007, 2008 and 2009.

Organizations that had their exempt status revoked for failure to file under Section 6033(j), but do not qualify for the relief described above, must also file the application for recognition of tax exempt status and pay the normal user fee.  The application must include a request for retroactive reinstatement that conforms to requirements set out in IRS Notice 2011-44.

For tax years beginning on or after January 1, 2010, California tax-exempt organizations with gross receipts normally equal to or less than $25,000 (except churches) are now required to electronically file FTB 199N, California e-Postcard (available January 3, 2011).

The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less.  The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year.

For more information, click here.

1.     If your organization’s gross receipts are normally $50,000 or less, you can file a Form 990-N – a simple filing (this threshold has been increased from $25,000 – thank you IRS!)

2.     If your organization’s gross receipts are greater than $50,000 but less than $200,000 (and total assets not more than $500,000), you can file a 990-EZ (which is not necessarily easy, but it is easier than the Form 990)

3.     All others must file Form 990

Click here for more information.

The business must be a C corporation with gross assets of no more than $50 million at the time of investment.

Tell your potential investors to take advantage of this great opportunity!

The recently enacted health insurance reform legislation includes a tax credit that helps many small businesses provide coverage for their employees.  Many tax-exempt non-profit organizations can also receive the health care tax credit, although at a reduced level.

To qualify, small businesses and exempt organizations must:

• Have fewer than  25 full-time equivalent (FTE) employees
• Pay average annual wages below $50,000, and
• Cover at least 50% of their workers’ health insurance premium costs.

Small businesses can receive a credit up to 35% of their 2010 employee premium costs.  This amount increases to 50% in 2014.  The non-profit credit starts at 25% in 2010, increasing to 35% in 2014.

The credit is effective January 1, 2010.  Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.

For more information click here.

Since many of us do not pay this tax, the state legislature adopted Assembly Bill x4-18 (Stats. 2009, Ch. 16) which requires “qualified purchasers” to register with the BOE and report and pay use tax.

A “qualified purchaser” means a business that meets all of the following conditions:

• Receives at least $100,000 in gross receipts from business operations per calendar year.
• Not required to hold a seller’s permit or certificate of registration for use tax.
• Not a holder of a use tax direct payment permit.
• Not otherwise registered with the BOE to report use tax.

A qualified purchaser may register for a use tax account by completing the BOE-404-A, Use Tax Registration, and mailing it to the BOE,

Board of Equalization
Tax Source Group, MIC: 007
PO Box 942879
Sacramento, Ca 94279-0007

There is no fee to register.

For more information, click here.

In Garnett v. Commissioner, the U.S. Tax Court reversed a longstanding IRS practice of applying the Limited Partner (LP) passive loss deduction limitation to owners of Limited Liability Partnerships (LLPs) and Limited Liability Companies (LLCs). The Tax Court ruled that LLP and LLC owners that are legally permitted to actively engage in management, and are found to have exercised their management rights, are not subject to the presumption that they are passive investors. Therefore, these taxpayers are not required to wait for the LLP or LLC to distribute profits before they may deduct losses related to the entities.

Although the Tax Court opinion does not mention L3Cs, they are subject to the applicable statutes and regulations and thus fall within the court’s reasoning.

The taxpayers in Garnett owned interests in LLPs and LLCs formed in Iowa. The Iowa organizing statutes for LLPs and LLCs are similar to those in many other states and allow owners to participate in the organizations’ management. This stands in contrast to LP organizing statutes that prohibit limited partners from participating in management, and treat those that do as general partners.

Internal Revenue Code Section 469(h)(2) contains a presumption that limited partners cannot deduct partnership losses from other income because they are passive investors. Passive investors generally may only deduct losses from income earned from their investment. Therefore, most limited partners cannot deduct LP losses until the LP pays them a return on their ownership interest. In Garnett, the IRS argued that the presumption in section 469(h)(2) also applies to owners of LLP and LLC interests because the rule stems from the fact that the owner has limited liability for the business’s debts and liabilities.

The Tax Court rejected the IRS’s argument that the taxpayers’ limitation on liability automatically subjected them to the presumption in Section 469(h)(2). The Court found that LPs differ substantially from LLPs and LLCs because owners of LLPs and LLCs are permitted to participate in management, and are typically governed by the general partnership provisions of authorizing legislation. Similarly, upon reviewing the legislative history relating to the presumption, the Tax Court found that it was intended to apply to limited partners that are not legally authorized to participate in a partnership’s management.

Finally, the court noted that the Section 469(h)(2) presumption has a general partner exception for limited partners that possess dual limited and general partnership interests. Therefore, the legislation acknowledges that some limited partners with limited liability also possess general partnership management interests, and excludes those limited partners from the presumption.

In this circumstance, Iowa law permits owners of LLPs and LLCs to actively engage in management. The Tax Court noted that the question of whether a taxpayer actually exercises this management right depends on the facts and circumstances of each case. The Garnett taxpayers argued – and the IRS agreed – that they exercised their management rights relating to all of the entities. Unfortunately the opinion does not provide much detail about the nature of the Garnett taxpayers’ management activities. However, the Tax Court directs us to the general tests for “material participation” under Section 469 and the related regulations. In essence, these sections provide that a taxpayer that is regularly, continually, and substantially engaged in management may avoid the presumption.

Cecily Jackson is a Los Angeles attorney specializing in tax-exempt organizations and small business law.