Following the November election, Congress will return and pass budget bills for fiscal year 2011. The short “lame-duck” session will be very busy because Congress faces major decisions on the budget bills and also has not completed work on 2011 taxes.
A group of 31 House Democrats sent a letter to Speaker Nancy Pelosi (D-CA) and supported a 2011 extension for all of the 2001/2003 tax cuts. If there were a deadlock in Congress in November, then there would be a large tax increase for all Americans on January 1, 2011. However, the White House and Speaker Pelosi have supported extending the “middle class” tax cuts, but requiring single persons with incomes over $200,000 (married couples over $250,000) to pay taxes at a higher rate.
House Minority Whip Eric Cantor (R-VA) expressed concern that there was not a vote on extension of the tax cuts. He indicated that with the combination of support by most Republicans and 31 Democratic House members, the tax cuts could be extended for 2011.
In the November session of Congress, there is a need to address income taxes, capital gains tax and estate taxes.
1. Income taxes – The White House and Speaker Pelosi propose extending the middle class tax cuts and allowing the top two income tax brackets to increase to 36% and 39.6%. Most Republicans and the 31 Democratic House members would extend all of the tax cuts.
2. Capital Gains Tax – The White House and Speaker Pelosi would increase the tax from 15% to 20%. Most Republican House members and many moderate Democratic members would retain the 15% rate for 2011.
3. Estate Tax – If there is a deadlock in Congress, the estate tax exemption returns to $1 million and the tax rate will be 55%. The White House and House Democratic leaders have generally supported an exemption of $3.5 million with a rate of 45%. The last proposed compromise by Sen. Jon Kyl (R-AZ) and Sen. Blanche Lincoln (D-AR) was for an exemption of $5 million with a rate of 35%.
Editors Note: Your editor and this organization take no specific position on these tax proposals. The information is offered as a public service to our readers.
IRS Urges Small Nonprofits to File Before October 15th
Lois Lerner, IRS Tax-Exempt and Government Entities Division Director, indicated that the October deadline is quickly approaching for small nonprofits who have not yet filed their return.
In the Pension Protection Act of 2006, a requirement was created for small nonprofits to file an e-postcard return. The requirement was applicable starting in year 2007. If small nonprofits did not file the return on the IRS website by April 15, 2010, they will automatically lose exempt status.
This deadline was extended by the IRS until October 15, 2010. Lerner indicated that about 60,000 small nonprofits have now viewed www.IRS.gov and completed the online Form 990-N (electronic postcard).
However, the IRS website has a list of organizations who have not filed. The www.IRS.gov list includes the last recorded address and contact person for those who have not yet filed. The IRS encourages all smaller organizations to retain their exempt status by filing prior to the October 15th deadline. If small organizations file by that date, there will not be a penalty.
Midsize organizations may qualify to file IRS Form 990 EZ. The IRS website also explains how these organizations may file by October 15th. Because they are past the normal deadline, there is a compliance fee for that filing. The explanation of the compliance fee is also available on www.IRS.gov.
Congress Cautions on Political Activities
Senate Finance Chairman Max Baucus (D-MT) sent a letter on September 29, 2010 to IRS Commissioner Doug Shulman. Sen. Baucus requested a review by the IRS of certain nonprofits for improper political activity. Sen. Baucus stated, “Political campaigns and powerful individuals should not be able to use tax-exempt organizations as political pawns to serve their special interests. The tax exemptions given to nonprofit organizations come with a responsibility to serve the public interest and Congress has an obligation to exercise the vigorous oversight necessary to insure they do.”
In response to a request by Congress, the Congressional Research Service published RL 33377 on September 24, 2010. It outlines permitted political activities by nonprofits in seven specific areas.
1. Voter Guides – A charity may prepare voter guides provided that it does not indicate a preference for a candidate. The voter guide must not be biased through: the inclusion of some candidates and not others; editing the candidate’s responses to questions; and not providing a reasonable time for candidates to respond.
2. Public Forums – Nonprofits are permitted to conduct unbiased and nonpartisan public forums. All candidates should be invited to attend and questions must come from a nonpartisan independent panel. The candidates should all have equal opportunity to present their viewpoints.
3. Speaker Invitations to Candidates – It is permitted if all candidates are given opportunities to speak to the group. There should be no preference for a particular candidate and no fundraising at the event.
4. Voter Registration – It is entirely permissible to encourage voters to register and to indicate the time and location for voting. There should be no preference for candidates and no indication of the party affiliation of candidates at voter registration.
5. Issue Advocacy – Many nonprofits are advocates for education, healthcare, disaster relief, and assistance for those in need. This issue advocacy is permitted with certain guidelines. There should be no specific candidate identified with a particular issue. The issue advocacy should be consistent throughout the year and not prepared only for the election.
6. Web Links – Nonprofits should exercise care in providing a web link from their site to the website of a specific candidate. If all candidates in a given election are represented through links, this may be permissible.
7. Appearances by an Organization Leader – An organization leader may participate in campaign activities in his or her private capacity. However, the organization leader may not express a campaign or candidate preference in organizational publications or at an organizational function.
Applicable Federal Rate of 2.0% for October – Rev. Rul. 2010-24; 2010-40 IRB 1 (17 Sept. 2010)
The IRS has announced the Applicable Federal Rate (AFR) for October of 2010. The AFR under Sec. 7520 for the month of October will be 2.0%. The rates for September of 2.4% or August of 2.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2010, pooled income funds in existence less than three tax years must use a 4.6% deemed rate of return.