Revisions to the Uniform Guidance Affecting Recipients

By Tammy Ricciardella, CPA

On Aug. 13, 2020, the Office of Management and Budget (OMB) issued Final Guidance on amendments to the OMB Guidance for Grants and Agreements (Uniform Guidance). This reflects the first revisions to this guidance since they were originally issued in 2013. The impact from these revisions range from minor and unique circumstances to large-scale changes that affect all recipients. Thus, if you receive federal funding, it is important that you review the OMB revisions in their entirety to ensure you are familiar with these changes and implement necessary changes to your systems and provide appropriate training to your grants management and accounting personnel.

The revisions are generally effective for new awards issued on or after Nov. 12, 2020.

Following is a high level summary of certain of the noteworthy administrative type changes:

  • 2 CFR 200.414(f) De Minimis Rate – this section permits entities with negotiated indirect cost rate agreements (NICRA) that have expired to use the 10% de minimis rate to calculate indirect costs.
  • 2 CFR 200.414(h) Publication of NICRAs – this is a new section that requires certain information related to NICRAs to be collected and displayed on a public website. The information is limited to the indirect negotiated rate, distribution base and the rate type.
  • 2 CFR 200.322 Domestic Preferences – this section encourages recipients to “maximize use of goods, products and materials produced in the United States.”
  • 2 CFR 200.320 Methods of Procurement – this section was amended to reflect the revised thresholds for micro-purchases at $10,000 and the simplified acquisition threshold at $250,000. This also permits recipients to request higher micro-purchase thresholds up to $50,000 from the agencies.
  • 2 CFR 200.244 Closeout – OMB revised the time period for recipients to submit closeout reports and liquidate all financial obligations from 90 days to 120 days.

There were also certain clarifications of existing provisions that were made to provide clarity related to a pass-through entity’s responsibilities. These revisions clarified that:

  • Pass-through entities are responsible for addressing only a subrecipient’s audit findings specifically related to its award.
  • OMB directs pass-through entities to use a subrecipient’s NICRA but, if none exists, the parties are to either negotiate a rate, use the de minimis rate, or subrecipient may use the cost allocation method to account for indirect costs.

As part of the update the provisions of the National Defense Authorization Act for FY 2019 was incorporated which prohibits the obligation or expenditures of federal funds and awards for the use of “covered telecommunications equipment or services.” (See 2 CFR 200.216) This prohibition is effective Aug. 13, 2020.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2021). Copyright © 2021 BDO USA, LLP. All rights reserved.

Nonprofit Data Breach Vulnerabilities and How to Avoid Them

By Mike Lee, CIPM, Alexandre Chanoine, J.D. and Derrick King

As more people are shifting to digital lifestyles and remote operations, data is being passed through the internet now more than ever. Proportionate to this, however, are the opportunities for potential compromise of the data, particularly via a data breach. Data breaches are the unauthorized access or disclosure of data for other than authorized and intended purposes. Nonprofit organizations, regardless of size, can be susceptible to a data breach as most accept and facilitate donations, which typically require the collection, processing, and maintenance of financial information. According to the Association of Certified Fraud Examiners 2020 Global Study, nonprofit organizations may be especially vulnerable compared to their for-profit counterparts as resources for privacy/security infrastructure are oftentimes harder to allocate. In recent years, cybercriminals have sought to harvest data for their own gain, targeting nonprofit donor and even employee data systems.

Common Causes of Data Breaches

Data breaches can transpire and come in various forms. Per The NonProfit Times, about 75% of data breaches originate from outside the organization via malicious hackers and phishing activities, while approximately 25% stem from internal sources. The following are some of the most common causes of breaches:

  • Lack of organizational privacy/security infrastructure, which incidentally is the part an organization can control. Privacy practices and controls (whether administrative or technical) may not appear as a high return on investment, but they can and will eventually be a good use of organizational resources. Do not let this be an afterthought.
  • Human error or negligence – everyone has an “oops” moment, whether it’s accidentally sending an email to an unintended recipient, attaching the wrong file or falling for a phishing attack. These are common honest mistakes absent malicious intent and can be remediated through mandatory privacy trainings, privacy awareness campaigns or administrative announcements reminding employees to secure the data they process.
  • Ransomware and phishing attacks can and have been extremely damaging to organizations and individuals. Ransomware is a type of malicious software designed to block access to a computer system until a sum of money is paid to the actor. Phishing is the fraudulent act of sending emails posing to be from a reputable company in order to trick individuals into providing their personal data, such as passwords or credit card information. When in doubt, if something doesn’t appear to be for legitimate purposes or from a legitimate source, defer to your IT and privacy/security personnel.
  • E-commerce hacks can occur if your organization uses an online store as a fundraising tool. Given the volume of payment information collected and stored, this opens up donors’ personal data to compromise if not adequately secured.
  • Despite the move to digital platforms and mediums, stolen hardware and/or physical files can still be compromised. It may be a laptop left in the backseat of a car that was just broken into or data that was physically mailed out without a tracking mechanism and can’t be located. Users should always be cognizant of the data they process and maintain—especially outside of their normal work environment.

Recent Nonprofit Data Breaches

Nonprofit organizations have incurred significant breaches in recent years, both in terms of volume of records compromised, as well financial losses. The following are several examples—each by an external party—with varying results that may be surprising.

  • In May 2019, a New York-based social services agency, suffered a breach of upwards of 1,000 of its clients’ personal data when two of their employees’ email accounts were hacked. Per the organization’s official notice of the incident, the personal data breached may have included full names, addresses, Social Security numbers, financial account information, medical information, health insurance information and/or driver’s license or other government identification numbers. Following initial detection and reporting of the breach, the agency reset the passwords for the hacked accounts.
  • A Connecticut-based charity fell victim to a nearly $1 million cyberscam in May of 2017. Hackers were able to use the email account of a U.S. employee to create false invoices and other documents to trick the organization into sending nearly $1 million to a fraudulent entity in Japan. Unfortunately, by the time the breach was detected, the transfer had already cleared. However, the organization was able to recoup all but $112,000 via its insurance policy.
  • A Charleston, S.C. cloud-based fundraising vendor for nonprofits and educational institutions, incurred a ransomware attack in early 2020 before it was detected in May of the same year. You know how they say, “Never pay the ransom?” The vendor paid the ransom. However, before receiving confirmation that the data had been destroyed, the attackers copied personal data from approximately 6 million clients—including donors, potential donors, patients and other stakeholders. Among the heavily impacted clients were Inova Health, Saint Luke’s Foundation and MultiCare Foundation.

Best Practices to Prevent Data Breaches

Past data breaches suffered by nonprofit organizations provide us with lessons learned, which can then be leveraged into best practices. Consider the following to bolster your organization’s privacy/security framework and minimize exposure to risks:

  • Leverage external resources to identify and cover any privacy/security gaps. Perform a risk assessment to take inventory of what personal data is collected, used and managed to determine the risks associated with possessing the data. Purchasing cyber liability insurance can also help with providing comprehensive risk management insurance, and mitigate the financial impacts of a data breach. (See Mark Millard’s article on page 15 for more information.)
  • Fortify your donation platform’s security. Work with IT, as well as any vendors to comply with applicable privacy/security regulations and standards, such as Payment Card Industry Data Security Standard (PCI DSS) and the General Data Protection Regulation (GDPR). These are particularly relevant given the high utilization of credit card information.
  • Regularly review and actively manage users’ access permissions. Monitor and update role-based access for users who have access to data throughout business operations to ensure they only use what they need proportionate to their respective roles. This will also help mitigate the disgruntled former employee breach scenario.
  • Implement data minimization controls, only collecting and processing what information is needed for authorized and legitimate business purposes. Similarly, implement and adhere to a data retention policy, only retaining what is necessary to accomplish the objectives and properly disposing of data when it is no longer needed.
  • Ensure older and sunsetting technologies have been wiped of personal data prior to getting rid of them. Storing data in multiple locations and mediums helps mitigate hardware failure, but they still need to be accounted for prior to retirement.
  • Report breaches, as soon as they are detected. While the point is to mitigate the risks if a breach occurs, the reality is that they are almost unavoidable. It is important to have dedicated incident/breach response policies and procedures, including tabletop activities to prepare for the inevitable breach. (A tabletop activity is a security incident preparedness activity, taking participants through the process of dealing with a simulated incident scenario and providing hands-on training highlighting flaws in incident response planning.)


Data breaches — the causes, impacts and consequences — can be devastating to an organization. As such, it is imperative to be prepared for what is unforeseen but nonetheless predictable. While this may seem daunting, particularly for smaller nonprofits, it should be emphasized that some of the most basic data privacy/security best practices and controls are easy to implement at little to no cost. Overall, the biggest step to be taken in protecting your organization and stakeholders is to make privacy/security a priority. Even without in-house resources, nonprofits can benefit from leveraging external ones to help augment policies and procedures. Preparing for this upfront will save a lot of trouble if a breach occurs.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2021). Copyright © 2021 BDO USA, LLP. All rights reserved.

Cares Act Employee Retention Credits for Nonprofit Employers

By Carolyn Smith Driscoll, Gabe Rubio, Brad Poris

Many nonprofit organizations were forced to shutter or temporarily close their operations under a governmental order as a result of the coronavirus pandemic, while others were forced to severely limit their offerings. One way to continue to pursue your organization’s objectives is to ensure that you are still able to function, even if only in a limited capacity. The government has supported nonprofits and the continuation of their services with the passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020, which includes the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC). Under the CARES Act, organizations could take advantage of either the PPP or the ERC, but not both. In welcome news for nonprofit organizations, the Consolidated Appropriations Act, 2021 (Relief Act, signed by former President Trump on Dec. 27, 2020) retroactively eliminates this limitation and extends and enhances the ERC through the first two quarters of 2021. The ERC is one of the most beneficial provisions of the Relief Act relevant to nonprofit organizations. If you did not consider the ERC in 2020, or were not eligible to consider the ERC because you took a PPP loan, the retroactive ability to benefit from both PPP loans and the ERC is a powerful reason to consider the ERC for 2020. Looking ahead to 2021, the enhanced amount of the credit for wages paid during the first two quarters of 2021 provides another compelling reason to consider the ERC.

Yes! Tax-exempt organizations are eligible for the ERC because they are deemed to be engaged in a trade or business regarding the entirety of their operations. Examples of nonprofit organizations that have already taken advantage of the credit are hospitals, schools, museums, performing arts centers and churches.

The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts. The ERC can be claimed quarterly to help offset the cost of retaining employees. Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits. Unlike the PPP, which was on a first-come, first-served basis, the ERC can be claimed up to three years from the date in which your quarterly payroll return was filed.

To claim the ERC in any given calendar quarter, nonprofit organizations must meet one of the following criteria during that quarter:
• Operations were fully or partially suspended as a result of orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19; or
• The organization experienced a significant decline in gross receipts during the calendar quarter compared to 2019. Specifically, for 2020, gross receipts for the 2020 quarter decline more than 50% when compared to the same 2019 quarter. Eligibility for the credit continues through the 2020 quarter in which gross receipts are greater than 80% of gross receipts in the same 2019 quarter.
• For 2021, the gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019, and a safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
• Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.

Yes! As described above, one of the most favorable provisions in the Relief Act allows taxpayers to receive PPP loans and claim the ERC. This overlap was not permitted when the CARES Act was originally enacted, and organizations in need of cash infusions during 2020 more frequently turned to PPP loans as a source of funds rather than the ERC. Importantly, the Relief Act makes the ability to claim the ERC and receive PPP loans retroactive to March 12, 2020. As a result, organizations that received PPP loans in 2020 (and/or will receive new loans in 2021) can now explore potential ERC credits for 2020 and 2021.

The answer depends on an organization’s employee count. Eligible organizations that are considered “Large Employers” can only claim the ERC for wages paid to employees for the time the employees are not providing services. This aligns with the purpose of the ERC, which is to encourage employers to retain and compensate employees during periods in which businesses are not fully operational.

Smaller eligible organizations may claim a credit for all wages paid to employees. The Relief Act increases the threshold used to determine Large Employer status for 2021 claims to an employee count of more than 500 (for 2020, it is more than 100). This favorable change broadens the number of eligible nonprofit organizations that can claim the ERC for all wages paid to employees, including wages paid to employees who are providing services. Importantly, qualified healthcare expenses count as wages.

INSIGHT: If you furloughed your employees but continue to pay their health insurance, you can claim the ERC. Furloughed employees do not have to receive wages—health care expenses alone qualify as wages for purposes of the ERC.

Large Employer status is determined by counting the average number of full-time employees employed during 2019.

For this purpose, “full-time employee” means an employee who, with respect to any calendar month in 2019, worked an average of at least 30 hours per week or 130 hours in the month. This is the same definition used for purposes of the Affordable Care Act. Importantly, aggregation rules apply when determining the number of full-time employees. In general, all entities are considered a single employer if they are a controlled group of corporations, are under common control or are aggregated for benefit plan purposes.

Organizations that operated for the entire 2019 year compute the average number of full-time employees employed during 2019 by following the steps below:

Step 1: Count the number of full-time employees in each calendar month in 2019. Include only those employees who worked an average of at least 30 hours per week or 130 hours in the month.

Step 2: Add up each month’s employee count from Step 1 and divide by 12.

INSIGHT: Part-time employees who work, on average, less than 30 hours per week are not counted in the determination of Large Employer status. Omitting part-time employees from the computation should result in more nonprofit organizations having 500 or fewer full-time employees and, therefore, being able to claim the ERC for all wages paid to employees in the first two quarters of 2021 (assuming eligibility criteria are met).

No. Simply put, there is no double dipping. Wages used to claim the ERC cannot also be counted as “payroll costs” for purposes of determining the amount of PPP loan forgiveness, and organizations that want to benefit from the ERC and have their PPP loans fully forgiven will need to have sufficient wages to cover both. To the extent an organization does not have sufficient wages, strategic planning will be needed to generate maximum benefits.

SUMMARY OF ERC CHANGES PRIOR LAW 3/13/20 – 12/31/20 NEW LAW: 3/13/20 – 12/31/20 NEW LAW: 1/1/21 – 6/30/21
Interplay with PPP Loan No ERC if a forgiven PPP loan was received Taxpayers that receive a PPP loan can claim the ERC, but double dipping is not allowed.
Maximum Creditable Wages per Employee $10,000 per year $10,000 per quarter
Maximum Credit 50% of eligible wages, up to $5,000 per employee 70% of eligible wages, up to $28,000 per employee
Threshold to be Considered a “Large Employer” (based on average full-time employees in 2019 and considering aggregation rules) More than 100 More than 500


  • Employers that previously reached the credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC.
  • Qualification for employers in 2021 based on the reduction in gross receipts test may provide new opportunities for businesses in impacted industries.
  • Eligible employers with 500 or fewer employees may now claim up to $7,000 in credits per quarter, paid to all employees, regardless of the extent of services performed. This rule previously was applicable to employers with 100 or fewer employees and a maximum of $5,000 in credit per employee per year. Aggregation rules apply to determine whether entities under common control are treated as a single employer.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2021). Copyright © 2021 BDO USA, LLP. All rights reserved.

Provider Relief Funds – Reporting and Audit Requirements

By Carla DeMartini, CPA, Chad Krcil, FHFMA, CHFP, and Venson Wallin, CPA, CGMA, CFE, CHC, FHFMA, CHFP, HCISPP

Through the CARES Act and supplemental funding from the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Act, the U.S. Department of Health and Human Services (HHS) is in the process of distributing $178 billion to hospitals and healthcare providers on the front lines of the coronavirus response and relief efforts. Qualified providers of healthcare, services and support may receive PRF payments for healthcare-related expenses or lost revenue due to COVID-19. While these distributions do not need to be repaid to the U.S. government, assuming providers comply with the terms and conditions established by HHS, these funds come with unique compliance, reporting and audit requirements that recipients must adhere to once they attest to the receipt of these funds.

Reporting Requirements

On Jan. 15, 2021, HHS released updated guidance on the PRF reporting requirements. Below, we outline what has changed since their last communication on Nov. 2, 2020. This amended guidance is in response to the CRRSA Act, which was passed in December 2020 and added $3 billion to the PRF (increasing the total funding from $175 billion to $178 billion) along with new language regarding reporting requirements.

Please note this is a summary of information and additional detail and guidance can be found in the reporting and auditing FAQ section of

  • On Jan. 15, 2021, HHS announced a delay in reporting of the PRF. HHS has not yet communicated further details on the deadline for this reporting. Recipients of PRF payments greater than $10,000 may register to report on their use of funds as of Dec. 31, 2020 starting Jan. 15, 2021. Healthcare providers should go into the portal, register and establish an account now so that when the portal is open for reporting, they are prepared to fulfil their reporting requirements.
  • Recipients who have not used all of the funds by Dec. 31, 2020, have from January 1 – June 30, 2021 to use the remaining funds. Healthcare organizations will have to submit a second report before July 31, 2021 on how funds were utilized for that six-month period.
  • The new guidelines further define the reporting entity and how to report if there is a parent company with subsidiaries for both General and Targeted Distributions:

Parent organizations with multiple Taxpayer Identification Numbers (TINs) that received General Distributions or TINS that received them from parent organizations can report the usage of these funds even if the parent was not the entity that completed the attestation.

While a Targeted Distribution may now be transferred from the receiving subsidiary to another subsidiary by the parent organization, the original subsidiary receiving the Targeted Distribution must report any of the Targeted Distribution it received that was transferred.

      The new guidance does state that distribution of Transferred Targeted Distributions will likely fall under increased scrutiny through an audit by the Health Resources and Services Administration (HRSA).

  • The calculation of lost revenue has been modified by HHS through this new guidance. Lost revenue is calculated for the full year and can be calculated using one of the following methods:

      Difference between 2019 and 2020 actual patient care revenue. The revenue must be submitted by patient care mix and by quarter for the 2019 year.

      Difference between 2020 budgeted and 2020 actual patient care revenue. The budget must have been established and approved prior to Mar. 26, 2020. This budget, as well as an attestation from the CEO or chief financial officer that it was submitted and approved prior to Mar. 26, 2020, will have to be submitted.

      Reasonable method of estimating revenue. An explanation of the methodology, why it is reasonable and how the lost revenue was caused by coronavirus and not another source will need to be submitted.

  • Recipients with unexpended PRF funds in full after the end of calendar year 2020, have an additional six months to utilize remaining funds for expenses or lost revenue attributable to coronavirus in an amount not to exceed the difference between:

      2019 quarter one to quarter two and 2021 quarter one to quarter two actual revenue,

      2020 quarter one to quarter two budgeted revenue and 2021 quarter one to quarter two actual revenue.

Audit and Compliance Requirements

Based on current information from HHS, provider relief funds are also subject to audit if more than $750,000 has been expended during an entity’s fiscal year.

Over the next two years, many entities, which have received PRF exceeding the $750,000 threshold, may require an audit for the first time. For nonprofit, for-profit and government entities, this would result in a Single Audit under the Office of Management and Budget’s (OMB) Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance). A program-specific audit option may also be available under 2 Code of Federal Regulations (CFR) 200 Subpart F Section 200.501(c), if an auditee expends federal awards under only one federal program (excluding Research and Development). HHS has also noted that for-profit entities that received these funds have a third option, which would be a financial audit under Generally Accepted Government Auditing Standards (GAGAS) also referred to as the Yellow Book. There is still pending guidance from HHS around this third option in the areas of expenditures versus receipts, disclosures and timing of the report. However, what is fairly certain is that this type of audit would be conducted under Section AU-C 805, Special Considerations- Audits of Single Financial Statements and Specific Elements, Accounts or items of a Financial Statement, and will require the inclusion of a Statement of Costs and Lost Revenues in relation to any HHS federal awards.

Additionally, there may be some confusion and uncertainty among recipients who require a Single or program-specific audit for the first time. These auditees may be unfamiliar with audit expectations and preparations that need to take place in order to respond to federal compliance requirements. Determination of what should be reported on the schedule of expenditures of federal awards (the SEFA) may be challenging at first, especially since federal guidance surrounding the PRF has been continuously evolving.

There are some timing nuances and questions on what amounts (i.e., expenditures and lost revenues) should be reported for PRF (CFDA 93.498) on the SEFA by recipients for fiscal year-ends prior to Dec. 31, 2020. The “Other Information” section in the PRF section of the OMB Compliance Supplement Addendum (Addendum) issued on Dec. 22, 2020 addresses this by stating that “PRF expenditures and lost revenue will not be included on SEFAs until Dec. 30, 2020 year-ends and later.” Rather, for fiscal years ended earlier than Dec. 30, 2020, recipients will report the 2020 93.498 expenditures and lost revenue in the 2021 audit. Keep in mind that this timing provision only affects the PRF program and is not applicable to other COVID-19 funding that healthcare entities may have received such as CFDA 93.461, COVID-19 Testing for the Uninsured or CFDA 93.697, COVID-19 Testing for Rural Health Clinics. For fiscal years ended Dec. 30, 2020 and later, the amounts reported on the SEFA (expenditures and lost revenue) should match the amounts submitted in the calendar year-end reporting required to be made directly to the HHS portal.

The deadline for the submission of the Single Audit reporting package to the Federal Audit Clearinghouse (FAC) is within the earlier of 30 calendar days after the single audit report’s issuance, or nine months after year end. However, per OMB Memo M-21-20 issued Mar. 19, 2021 an extension has been provided  that permits recipients and subrecipients that have not filed their single audit as of Mar. 19, 2021 that have fiscal year ends through June 30, 2021, to delay the completion and submission of the single audit reporting package to six months beyond the normal due date.  There is no requirement for individual recipients and subrecipients to seek approval for the extension, but recipients and subrecipients should maintain documentation of the reason for the delayed filing.

Next Steps for PRF Recipients

In the wake of this new guidance, PRF recipients should take the following steps:

  • Register in the HHS portal and establish an account as soon as possible.
  • Revisit lost revenue calculations to determine if current methodology is appropriate or if an updated methodology would be more appropriate under the new guidance.
  • Understand the ability to transfer General and Targeted distributions and the impact on reporting of these funds.
  • Develop reporting procedures for lost revenue and increased expense for reporting in the HHS portal.
  • Confirm whether your organization is subject to the single audit.
  • Review audit and compliance requirements that pertain to your organization.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2021). Copyright © 2021 BDO USA, LLP. All rights reserved.

IRS Issues Final Regulations on UBTI “Silos”

By Marc Berger, CPA, JD, LLM

On Dec. 2, 2020 the U.S. Treasury and IRS published final regulations under Internal Revenue Code (IRC or Code) Section 512(a)(6), the provision requiring tax-exempt organizations with more than one unrelated trade or business to calculate unrelated business taxable income (UBTI) separately with respect to each trade or business. The provision, which was added to the Code by the 2017 tax law often referred to as the Tax Cuts and Jobs Act (TCJA), is known as the UBI “Silo” provision. The final regulations provide guidance on how an exempt organization determines if it has more than one unrelated trade or business and, if so, how the organization calculates UBTI under Section 512(a)(6).

The final regulations generally follow the approach taken in the proposed regulations (issued in April 2020), while making a few modifications based on comments received from tax-exempt organizations and practitioners.

Identifying Separate Unrelated Trades or Businesses

Similar to the proposed regulations, most unrelated business activities must be classified using the first two digits of the North American Industry Classification System (NAICS) code that most accurately describes the trade or business. The IRS considered one commenter’s view that the NAICS 2-digit codes be used as a safe harbor and that a facts and circumstances test be applied as the primary method of identifying separate unrelated trades or businesses. In rejecting that suggested change the IRS noted that adopting a facts and circumstances test would offer exempt organizations less certainty and likely result in inconsistency among exempt organizations conducting more than one unrelated trade or business because of differing approaches exempt organizations would take in applying such a test. It further stated that a facts and circumstances test would increase the administrative burden on the IRS which, upon examination, must perform the same fact-intensive analysis on each of the unrelated trades or businesses identified by the exempt organization.

In clarifying how an exempt organization should choose an NAICS 2-digit code, the IRS reiterated that the choice of the code must focus on the separate unrelated trade or business activity engaged in, and not the NAICS 2-digit code that describes the activities the conduct of which are substantially related to the exercise or performance of the organization’s exempt purpose or function. For example, a college or university exempt under Section 501(c)(3) cannot use the NAICS 2-digit code for educational services to identify all of its separate unrelated trades or businesses.

One area that the final regulations differed from the proposed regulations concerns the ability to change an NAICS 2-digit code once it has been selected and reported on Form 990-T. The proposed regulations generally provided that, once an organization has identified a separate unrelated trade or business using a particular NAICS 2-digit code, the organization cannot change the NAICS 2-digit code describing that separate unrelated trade or business unless two requirements are met. First, the exempt organization must show that the NAICS 2-digit code chosen was due to an unintentional error. Second, the exempt organization must show that another NAICS 2-digit code more accurately describes the unrelated trade or business. In response to numerous comments on this issue, the final regulations remove the restriction requirements for changing NAICS 2-digit code(s). Instead, the final regulations require an exempt organization that changes the identification of a separate unrelated trade or business to report the change in the taxable year of the change in accordance with forms and instructions. To report the change, the final regulations require an organization to provide certain information with respect to each separate unrelated trade or business the identification of which changes: (1) the identification of the separate unrelated trade or business in the previous taxable year, (2) the identification of the separate unrelated trade or business in the current taxable year, and (3) the reason for the change. The IRS anticipates that the instructions to the Form 990‑T will be revised to provide instructions regarding where and how changes in identification are reported.

Activities Deemed Separate Trades or Businesses

As provided under the proposed regulations, certain activities are treated as separate trades or businesses under the final regulations.

Investment Activities

The proposed regulations provided an exclusive list of an exempt organization’s investment activities that may be treated as a separate unrelated trade or business for purposes of section 512(a)(6). Under the proposed regulations, for most exempt organizations, such investment activities are limited to: (i) qualifying partnership interests; (ii) qualifying S corporation interests; and (iii) debt-financed properties. Although commenters recommended modifications to the rules regarding the individual items included in this list, no commenters objected to the treatment of these items as investment activities. The final regulations adopt this list of investment activities without change.

Similar to the proposed regulations, the final regulations permit the aggregation of qualifying partnership interests (QPIs) into one separate unrelated trade or business in order to reduce the administrative burden of obtaining information from the partnership regarding its underlying trade or business activities where its percentage interest level indicates that the exempt organization does not significantly participate in the partnership. QPIs are generally defined as partnership interests that meet one of two tests: (1) A de minimis test, which the exempt organization satisfies if it holds directly or indirectly no more than 2% of the profits interest and no more than 2% of the capital interest of the partnership; or (2) A participation test (formerly known as the “control test” under the proposed regulations), which the exempt organization satisfies if it holds directly or indirectly no more than 20% of the capital interest and does not “significantly participate in” (formerly “control”) the partnership.

As modified by the final regulations, an exempt organization significantly participates in a partnership if:

  • The exempt organization, by itself, may require the partnership to perform, or prevent the partnership from performing (other than through a unanimous voting requirement or through minority consent rights), any act that significantly affects the operations of the partnership;
  • Any of the exempt organization’s officers, directors, trustees, or employees have rights to participate in the management of the partnership at any time;
  • Any of the organization’s officers, directors, trustees, or employees have rights to conduct the partnership’s business at any time; or
  • The organization, by itself, has the power to appoint or remove any of the partnership’s officers or employees or a majority of directors.

Similar to the proposed regulations, the final regulations require the interests of certain supporting organizations and controlled entities to be combined with those of the of the exempt organization in determining whether the organization’s interest crosses the participation test’s 20% threshold. One difference, however, is that the final regulations do not require an organization to combine the interests of a Type III supporting organization unless that supporting organization is the organization’s parent.

In making the determination whether an exempt organization’s interest in a partnership meets one of the two tests to be a QPI, the final regulations follow the rule in the proposed regulations that an exempt organization’s percentage interest is determined by averaging the organization’s percentage interest at the beginning of the partnership’s tax year with its percentage interest at the end of that same partnership tax year. The final regulations, however, now provide a grace period when a change in an organization’s percentage interest is due entirely to the actions of other partners. The grace period permits a partnership interest that fails to meet the requirements of either test because of an increase in the current year’s percentage interest may be treated as meeting the requirements of the de minimis test or the participation test that it met in the prior year for the taxable year of the change if: (1) the partnership interest met the requirements of the de minimis test or the participation test in the organization’s prior taxable year without application of the grace period; (2) the increase in percentage interest is due to the actions of one or more partners other than the exempt organization; and (3) in the case where a partnership interest met the participation test in the prior taxable year, the interest of the partner or partners that caused the increase in the current year was not one that was combined with the exempt organization’s interest as described in the preceding paragraph in either the prior or current year.

With respect to qualifying S corporation interests (QSIs), the final regulations clarify that the exempt organization can rely on the Schedule K-1 (Form 1120-S) that it received from the S corporation if the form lists information sufficient to determine the organization’s percentage of stock ownership for the year. For example, a Schedule K-1 that reports “zero” as the organization’s percentage interest in the S corporation is not sufficient to determine the organization’s percentage of stock ownership for the year. The IRS is considering whether revision of Schedule K-1 is needed to provide the information necessary to determine whether an S corporation interest is a QSI.

With respect to debt-financed income, several commenters suggested that this income should be reportable using an NAICS 2-digit code instead of as an investment activity. The final regulations rejected this suggestion and adopted the proposed regulations treatment as a separate investment activity.

Finally, the transition rule included in both IRS Notice 2018-67 and the proposed regulations, which permitted an organization to treat any partnership interest acquired prior to Aug. 21, 2018 as a single trade or business activity, will lapse as of the first day of the organization’s taxable year following the issuance of final regulations. Despite receiving several comments asking the Treasury Department and the IRS to adopt the transition rule as a grandfather rule, it was not so adopted in the final regulations.

Payments from Controlled Entities

Similar to the proposed regulations, all “specified payments” (i.e., interest, rents, royalties and annuity payments per Code Sec. 512(b)(13)) received by a controlling tax-exempt organization from an entity it controls (i.e., more than 50 percent controlled by the organization) are treated as gross income from a separate unrelated trade or business. Moreover, if a controlling organization receives specified payments from two different controlled entities, the payments from each controlled entity would be treated as a separate unrelated trade or business.

Certain Amounts from Controlled Foreign Corporations (CFCs)

Similar to the proposed regulations, amounts included in UBTI under Section 512(b)(17) are treated as income derived from a single separate unrelated trade or business.

Other Items of Note

Allocation of Expenses – Pending the publication of further guidance in a separate notice of proposed rulemaking, the final regulations continue to provide that an exempt organization with more than one unrelated trade or business must allocate deductions between separate unrelated trades or businesses using the reasonable basis standard described in Treas. Reg. Section 1.512(a)-1(c).

Net Operating Losses (NOLs) – Under Section 512(a)(6), NOLs arising in a tax year beginning before Jan. 1, 2018 (“pre‑2018 NOLs”) may be taken against aggregate or total UBTI, while NOLs arising in a tax year beginning after Dec. 31, 2017 (“post‑2017 NOLs”) may only be taken against UBTI from the same trade or business from which the post-2017 NOL arose. The final regulations require an organization with both pre-2018 NOLs and post-2017 NOLs to first deduct its pre-2018 NOLs from its total UBTI before deducting any post-2017 NOLs from the UBTI of the separate trade or business that gave rise to the NOL. The final regulations further provide that if a trade or business is terminated, sold, exchanged or disposed of, any NOLs remaining after offsetting any gain on the sale or disposition are suspended. Suspended NOLs may only be used if the previous business is later resumed or if a new business using the same NAICS 2-digit code is commenced or acquired. For this purpose, a business is considered “terminated” if the appropriate identification of the business changes from one NAICS code to a different NAICS code.

Charitable Contributions – Under Section 512(b)(10), tax-exempt corporations can take charitable contribution deductions under Section 170 up to 10% of UBTI (tax-exempt trusts look to Section 512(b)(11) for its percentage limitations). The final regulations provide that in applying these percentage limitations, exempt organizations would use total UBTI computed pursuant to Section 512(a)(6) and would not allocate the charitable contribution deduction among silos.

Public Support Tests – The final regulations address the fact that the calculation of public support on Form 990, Schedule A could be negatively impacted by the treatment of UBTI under the new silo rules. To address this issue, the final regulations allow exempt organizations to calculate public support tests using either UBTI as computed under Section 512(a)(6) or UBI calculated in the aggregate, whichever is least administratively burdensome or provides the highest ratio for the organization.

Subpart F and Global Intangible Low-Taxed Income – Similar to the proposed regulations, the final regulations clarify that inclusions of Subpart F income under Section 951(a)(1)(A) and global intangible low-taxed income (GILTI) under Section 951A(a) are treated in the same manner as dividends for purposes of Section 512(b)(1).

The final regulations are applicable to tax years beginning on or after Dec. 2, 2020 (date of publication in the Federal Register). For virtually all exempt organizations this means their 2021 tax years. Organizations should consult with their tax advisors to ensure the identification of any and all of their separate unrelated trades or businesses, especially those organizations with significant investment activities.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2021). Copyright © 2021 BDO USA, LLP. All rights reserved.

Nonprofits Have Additional Time to Comply with New Lease Accounting Standards

By Lee Klumpp, CPA, CGMA

In 2016, the Financial Accounting Standards Board (FASB) updated its lease accounting rules (ASC 842) and closed a diversity in practice in the previous standard. The major change is that organizations must now include lease assets and liabilities on their balance sheets. The upshot is that despite a recently granted extension that applies to private companies and nonprofits, the task of becoming compliant is urgent and challenging. Impacted nonprofits don’t have a moment to spare.

Under the previous standards, operating leases were off-balance sheet. That essentially allowed companies to omit certain lease assets and liabilities from their balance sheets, potentially skewing their debt-to-equity ratio. In 2016, the International Accounting Standards Board estimated that public companies using either the International Financial Reporting Standards or accounting principles generally accepted in the United States of America (U.S. GAAP) had around $3.3 trillion of lease commitments, 85% of which were not recorded on their balance sheets. This, of course, makes it difficult for shareholders (stakeholders), investors and lenders to get a true sense of an organization’s financial health. Under the previous ASC 840 standard, operating leases were only required to be disclosed in the footnotes of the financial statements. Under ASC 842, the only leases that may be omitted from financial statements are short-term leases with an original term of fewer than 12 months. ASC 842 increases transparency and comparability among organizations that enter into lease agreements and provides a clearer picture of an organization’s liabilities related to leasing obligations. ASC 842 also includes extensive disclosures intended to enable users of financial statements to understand the amount, timing and judgment related to an entity’s accounting for leases and the related cash flows as well as disclosure of both qualitative and quantitative information about leases.

But what it also does is implement a one-size-fits-all accounting standard that significantly increases the reporting burden on smaller, nonpublic companies, including nonprofits. Implementation will involve significant challenges and require major investments in time, money and other resources. Fortunately at its Oct. 16, 2019 meeting, FASB affirmed its decisions on two proposed Accounting Standards Updates (ASUs) – one of which extended the implementation deadline for the new standards on leases that were not yet effective for private companies and nonprofits to the first fiscal year after Dec. 15, 2020, instead of Dec. 15, 2019, as originally mandated.

Subsequently, in June 2020 the FASB decided to provide near-term relief for the adoption of the leasing standards based on feedback from stakeholders regarding challenges with the adoption as a result of the current business and capital disruptions caused by the coronavirus (COVID-19) pandemic. As a result, the FASB issued ASU 2020-05 which provides an additional one-year deferral of the effective date of the leasing standards. As a result, the leasing standards will now be effective for private companies and private nonprofits for fiscal years beginning after Dec. 15, 2021. Public nonprofits who had not issued their statements as of June 3, 2020, can also opt to defer adoption until fiscal years beginning after Dec. 15, 2019. This is an elective deferral so entities can still choose early adoption if they wish.

This is good news for nonprofits, which now have extra time to implement these changes. However, it should also serve as a wake-up call, as many organizations weren’t even aware of the change and the need to become compliant. Even within this updated timeline, ensuring compliance will be a significant effort.

Nonprofits face multiple significant implementation challenges such as:

  • Identifying embedded leases in business arrangements
  • The number of business arrangements that were previously not identified as leases may now be identified as meeting the definition of a lease or embedded lease
  • Existing systems and processes may need to be modified or enhanced in order to provide information necessary to address the new reporting and disclosure requirements
  • Multiple departments across the organization will be affected by this standard, including information technology (IT), tax, legal, treasury, and financial planning and analysis, among others
  • Ongoing efforts to remain compliant might be more significant than the initial implementation effort

It’s clear that complying with ASC 842 is a time-consuming process. Organizations should develop an implementation timeline keeping several factors top of mind, including existing lease commitments, data governance maturity and cross-function coordination needs.

To get started, organizations should first learn one of the key lessons from public companies that have already gone through this process: The standard requires the collection of significant data from every lease and business arrangement that could contain an embedded lease that exists on, or will exist after, the effective date. Analyzing leases and business arrangements to identify and extract those details for inclusion in the organization’s financial reports requires substantial time and resources. It is crucial to identify the full population of leases upon adoption of ASC 842.

Nonprofits should also consider adopting the following best practices:

Solicit the involvement of the entire organization: Although the implementation of ASC 842 is primarily the responsibility of the organization’s accounting department, successful implementation requires support from across the entity, especially when an organization has a large real estate portfolio or embedded leases. This may mean seeking assistance from IT, legal or procurement departments. Soliciting executive sponsorship to champion implementation will also help to streamline the process.

Use technology to your advantage: Under the stress of deadlines, the compilation of lease terms and data can be daunting, especially within larger nonprofits where leases may exist across departments – and possibly internationally if the organization has international operations. For organizations that have developed a robust data governance program or specific procedures to collect and manage enterprise data, implementation should be considerably easier. However, for the many organizations that have yet to build out these structures, there are off-the-shelf and purpose-built technology solutions that can help standardize and aggregate the information.

Keep an open line of communication: Organizations that maintain a large physical footprint are impacted the most. They should factor in extra time for both implementation and keeping stakeholders informed. Unexpected roadblocks, such as a delay in receiving necessary data from external sources, should also be accounted for in the timeline. Benchmarking the organization’s progress on implementation against its timeline throughout the process is paramount in keeping on task and meeting goals.

The bottom line is that even with the extension, it will take a concerted effort to become compliant in time. Nonprofits need to start the implementation process now.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2020). Copyright © 2020 BDO USA, LLP. All rights reserved.

IRS Proposes Excise Tax Relief for Exempt Organization Executive Compensation Under Code Section 4960

By Marc Berger, CPA, JD, LLM, Alex Lifson, MBA, MST, Norma Sharara, JD, and Joan Vines, CPA

In June 2020 the IRS proposed regulations under Internal Revenue Code (IRC) Section 4960 that, among other things, would allow certain tax-exempt organizations and related for-profit entities to avoid paying 21% excise taxes on certain executive compensation. Even better, taxpayers may rely on the proposed regulations until final regulations are issued. The new rules are generally consistent with, and build further on Notice 2019-09 (issued on Dec. 31, 2018), which provided helpful initial guidance on Section 4960. See our primer on 4960. With a few exceptions, the proposed regulations are consistent with the interim guidance provided in Notice 2019-09, so it seems likely that final regulations will not include any major changes to the proposed rules. Comments on the proposed rules were due by Aug. 10, 2020.


The Tax Cuts and Jobs Act of 2017 (Public Law 115-97) created IRC Section 4960. As a result, starting in 2018, most tax-exempt organizations and certain governmental units, as well as for-profit employers who “control” or who are “controlled by” an “applicable tax exempt organization” (ATEO), may owe a 21% excise tax on (1) annual “remuneration” over $1 million paid to “covered employees” or on (2) any “excess parachute payments” (even if those are under $1 million).

ATEOs of all sizes (and their related for-profit entities) might owe this tax if they paid any employee $125,000 or more during any year beginning on or after Jan. 1, 2018. So even if the ATEO never paid any employee more than $1 million, the tax on excess parachute payments made to “highly compensated employees” could still be owed.

Section 4960 introduced several important new defined terms, including the following:

“Excess parachute payments” are amounts that exceed three times the covered employee’s five-year average wages and are contingent on an involuntary termination of employment.

“Remuneration” generally means Code Section 3401(a) wages paid during a calendar year ending with or within the employer’s tax year, excluding (1) Roth, tax-qualified retirement plans, 403(b) plan and governmental 457(b) plan contributions and distributions and (2) amounts paid to a licensed medical professional for the direct performance of medical services, but including amounts required to be included in income under 457(f)’s special timing rules (i.e., amounts are generally taken into account for the 4960 excise tax in the calendar year when the amount vests, regardless of when it is paid or included in income).

  • The proposed rules confirm that this special timing rule for determining annual remuneration does not include the 457(f) exceptions for short-term deferrals, certain severance payments and earnings on vested nonqualified deferred compensation (so such amounts would be included when determining 4960 excise tax). For example, short-term deferrals under 457(f) and 409A may be included in an employee’s taxable income in a different year than the year that those amounts must be included in 4960 excise tax calculations. Likewise, subsequent earnings on vested 457(f) amounts would be included in taxable income in a different year than the year those amounts must be included in 4960 excise tax calculations (for 4960, subsequent earnings on vested amounts are treated as paid annually, even if the amounts are not actually paid until later).
  • Under the proposed rules, remuneration and parachute payments that vested before the date in 2018 that the rules became effective for the ATEO are generally exempt from 4960 taxes (but would still count for purposes of determining whether an employee is a covered employee).

BDO Insight:

This clarification attempts to take some of the sting out of the fact that 4960 does not have a “grandfather” rule (and the IRS will not create one, since the IRS said that it lacks authority to do so).

Any entity that paid the excise tax in the 2018 or 2019 tax year on a payment that was vested prior to the applicable effective date for that entity should file a refund request.

  • The proposed rules also clarify that remuneration includes taxable, below-market, compensation-related loans made to employees (which might arise, for example, in connection with certain split-dollar life insurance arrangements). The proposed rules clarify that nontaxable expense allowances and reimbursements (such as under an accountable plan) and other nontaxable benefits (like directors’ and officers’ liability insurance coverage) are not included in remuneration. The IRS asked for comments on whether certain taxable employee benefits (like group term life insurance over $50,000) should be included in remuneration.
  • The proposed rules create an administrative exception for payroll periods that cross over calendar years, which tracks the Form W-2 reporting rule. Specifically, regular wages are treated as paid when actually or constructively paid (not when vested). So, if a pay period ends on Dec. 30, 2020, but salary for that period is not actually paid until Jan. 6, 2021, then the salary is treated as paid in 2021 (and the salary is not treated as being vested in 2020). But that exception would not apply to bonuses or other irregular compensation, so if those amounts vest on Dec. 31, 2020, they are included in 4960 for 2020, even if they are not paid until 2021.

“Covered employee” means a common law employee (including any former employee) of an ATEO if the employee is one of the five highest-compensated employees of the organization for the taxable year or was a covered employee of the organization (or a predecessor) for any preceding taxable year beginning after Dec. 31, 2016. This means that ATEOs need to identify who their common law employees are under Code Section 3401 (i.e., for purposes of withholding federal income tax from paychecks).

BDO Insight:

Despite much publicity about highly paid, public university sports team coaches being subject to the $1 million tax, some of those schools may avoid paying the 4960 tax unless Congress enacts a technical correction.


 One of the most sought-after changes the IRS adopted in the proposed regulations is that certain employees of a related for-profit employer providing services to an ATEO will no longer be treated as a “covered employee,” provided that the individual’s remuneration or hours of service satisfy specific limits. Generally, the exception will apply if (1) the services provided by the individual for the ATEO are not more than 10% of the total hours of service that the individual performs for all related organizations and (2) neither the ATEO nor any other entity controlled by the ATEO pays the individual for such services. The proposed rules set out a safe harbor for individuals who do not work more than 100 hours per year for the ATEO.

Many stakeholders wanted this exception to avoid 4960 excise taxes on the compensation paid to executives of for-profit companies that volunteer at a related ATEO, perform minor services as unpaid officers, perform limited services, or work limited hours. For example, many for-profit executives serve as officers of a corporate foundation created by the for-profit entity and many corporations have employee-sharing arrangements with their corporate foundation. Under the statute and Notice 2019-09, those arrangements would have subjected their compensation from the corporation to 4960 excise taxes.

The proposed rules also set out a more complicated “non-exempt funds” exception that might rescue certain situations where the individual who primarily works for the for-profit entity provides no more than 50% of his/her services to the ATEO and other conditions are satisfied. The proposed rules also include details on how to count hours of service for purposes of these exceptions.

Further, the proposed rules confirm that 4960 taxes apply only to employees, not to independent contractors or members of the board of directors who are not also employees of the ATEO.

BDO Insight:

It is not clear whether for-profit entities that paid 4960 excise taxes on IRS Form 4720 (Schedule N) for 2018 or 2019 would be eligible to claim a refund for those amounts based on the new position set out in the proposed regulations, because it is not specifically stated that this provision is retroactive. For-profit entities that have paid 4960 excise tax should set up a reminder to check for updates each year and discuss whether it would be appropriate to file a protective refund claim before the statute of limitations closes on the Form 4720.


Generally, the proposed regulations define “control” for 4960 excise taxes by using Section 512(b)(13) (i.e., the same rules for reporting related organizations on IRS Form 990). For example, the proposed rules provide that a person (or governmental entity) controls a nonstock corporation if (1) the person has the power to remove and replace more than 50% of the organization’s directors; or (2) more than 50% of the organization’s directors are “representatives” (trustees, directors, officers, employees or agents) of that person. But the proposed rules create a new exception, where an employee will not be considered a “representative” if the employee lacks authority commonly exercised by an officer, doesn’t actually act as a representative of the person, and this fact is reported on the organization’s Form 990. So, if a majority of lower-level corporate employees serve as directors or trustees of an ATEO, the for-profit entity would not be “related” to the ATEO for 4960 purposes. This alleviates concerns over “accidental control.” The IRS also clarified how “indirect control” and attribution principles work for 4960 purposes.

The proposed rules also confirm that the owner of a single member entity (such as an LLC) is the employer of the employees of that entity.

In addition, the proposed regulations clarify that federal government “instrumentalities” are subject to 4960, but requested comments on that issue.

Although the proposed rules say that a foreign organization that otherwise qualifies as an ATEO would be subject to 4960 excise taxes, the IRS has asked for public comments on whether foreign organizations that are related to an ATEO should be subject to 4960 excise taxes. The proposed regulations also clarify that a foreign organization that receives substantially all of its support from sources outside the United States would not be an ATEO.

Keep in mind that a “covered employee” includes any employee who was a covered employee of a predecessor ATEO. The proposed regulations outline when an entity is considered to be a predecessor ATEO, including asset acquisitions, corporate reorganizations and chains of predecessors.


The proposed regulations provide guidance for determining how to handle short tax years, such as the initial or final calendar year that the ATEO is subject to 4960. For 4960 purposes, the applicable year for measuring remuneration and excess parachute payments is the calendar year that ends “with or within” the ATEO’s taxable year. For example, for an ATEO with a fiscal year from July 1, 2021 to June 30, 2022, the applicable tax year is calendar year 2021 for determining who is a covered employee and what remuneration is subject to 4960 excise taxes.

BDO Insight:

Although this timing rule is generally the same method used for reporting compensation on Form 990, the definition of “remuneration” for 4960 differs from the definition of “compensation” reported on Form 990, so ATEOs cannot simply copy information reported on Form 990 for 4960 purposes.


The proposed regulations revise Notice 2019-09 by providing that only ATEOs could owe an excess parachute payment excise tax, based on a separation from employment with the ATEO. Notice 2019-09 implied that an ATEO or its related organizations are liable for excess parachute payment excise tax based on the aggregate parachute payments made by the ATEO and its related organizations, including parachute payments based on separation from employment from a related organization. Now it is clear that a separation from employment from a related entity that is not itself an ATEO would not trigger 4960 tax liability. Nevertheless, the proposed rules retained the concept that payments from for-profit related organizations must still be counted when determining the “base amount” and total payments that are contingent on involuntary separation from employment for 4960 excise tax purposes.


In the proposed regulations, the IRS repeated the warning it gave in Notice 2019-09 by confirming that the following are not reasonable, good faith interpretations of 4960:

  • Related for-profit or governmental entities are not liable for their share of the 4960 excise taxes.
  • A covered employee ceases to be a covered employee after a period of time.
  • A group of ATEOs may have only five highest-compensated employees among all related ATEOs.

BDO Insights:

ATEOs that do not have 4960 tax liability for a year would still need to make a list of covered employees each year, since there is no minimum dollar test to be a covered employee, and once someone is a covered employee that individual remains so forever, even after termination of employment. The IRS declined to adopt any minimum dollar threshold, grandfathering rule or sunset rule for determining covered employees.

The proposed regulations may help ATEOs design and implement employment, deferred compensation, severance and other agreements. For example, they could spread out when remuneration is included in 4960 calculations on remuneration in excess of $1 million by using vesting schedules for deferred compensation arrangements and may be able to avoid 4960 entirely (such as with a split dollar life insurance arrangement). ATEOs may also want to consider whether changing existing management service arrangements among related entities may reduce 4960 liability exposure.

Since 4960 took effect on Jan. 1, 2018 (with no grandfather or transition rules), ATEOs should already be complying. Until final rules are issued, ATEOs can continue to apply a reasonable, good faith interpretation of 4960, except where the proposed regulations or Notice 2019-9 specifically identified what will not qualify as a good faith interpretation.


This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2020). Copyright © 2020 BDO USA, LLP. All rights reserved.

Is Your Organization Audit Ready?

By Barbara Finke, CPA

First, what is an audit (and what is it not)? The purpose of an audit, as defined by the American Institute of Certified Public Accountants (AICPA), is “to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. An auditor’s opinion enhances the degree of confidence that intended users can place on the financial statements.” An audit provides reasonable assurance, not absolute assurance, that the financial statements are correct (not materially misstated) within a defined threshold. The AICPA provides a set of standards that all audit firms are required to follow to achieve the appropriate level of assurance to issue the opinion. But an audit is not just a generic set of checklists. The auditor creates a tailored set of procedures based on a gained understanding of your organization that will mitigate the risk of material misstatements in your financial statements.

What might cause you to need an audit for the first time? New funding sources, whether debt or grants, may require an organization to submit financial statements audited in accordance with generally accepted accounting principles . Therefore, before any new grant or debt is signed, make sure someone in the accounting department is reviewing the requirements thoroughly. A first-time audit is not something you want to be surprised with!

During the COVID-19 pandemic, your organization may have taken on new debt that requires an audit. In addition, you may have received funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act or other pandemic related funding that may require an audit under Office of Management and Budget’s Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). To understand if the funding you received is subject to the Uniform Guidance, you should review the Assistance Listing available at or contact the funding source.

So, how can you ensure that your organization is prepared for the first audit? Follow these 10 steps:

1.  Gather all of your organizational documents and significant contracts into one central location (preferably electronically), including:

  • Articles of Incorporation
  • Bylaws
  • Corporate Operating Agreement
  • Internal Revenue Service (IRS) exemption determination letter
  • IRS Form 1023 or 1024
  • Applicable state tax determination letters
  • All significant contracts (customer/grants/leases/vendor/pledge agreements)
  • Board minutes from the year(s) under audit
  • Commercial insurance policies
  • Trust agreements (annuities, life insurance policies, split-interest agreements, etc.)
  • All pension and post-retirement plan documents
  • Legal titles for real property owned
  • Corporate organizational chart
  • Staff organizational chart
  • Organization policies and procedures manuals
  • Other organizational documents

2. Document your key financial statement processes and policies. During the documentation process consider if your organization has proper internal controls and if the performance of those controls is adequately documented. Remember to consider your controls and policies over information technology systems that support your accounting records.

  • For guidance around internal controls, certain resources are available from the Committee of Sponsoring Organizations of the Treadway Commission at or the Green Book published by the U.S. Government Accountability Office at Document your key financial statement processes and policies. During the documentation process consider if your organization has proper internal controls and if the performance of those controls is adequately documented. Remember to consider your controls and policies over information technology systems that support your accounting records.

3. Compile a list of related parties, including related entities, and clearly document the relationship with each related party including a listing of any related agreements between the parties.

  • Consider consulting with your legal counsel (internal or external) to ensure all legal relationships are properly documented.Compile a list of related parties, including related entities, and clearly document the relationship with each related party including a listing of any related agreements between the partiesReview your accounting records and ensure that reconciliations are available for any balance sheet account as necessary to reconcile sub-ledger data (or any data maintained outside of the ledger) to the trial balance.

4. Review your accounting records and ensure that reconciliations are available for any balance sheet account as necessary to reconcile sub-ledger data (or any data maintained outside of the ledger) to the trial balance.

5. Ensure that transactional data from the period under audit (proof of expenses, sales, contributions or payroll records) is organized and available for testing as requested.

6. Ensure that a full schedule of all property and equipment, and related depreciation and amortization, is available.

7. Obtain sample audited financial statements of similar organizations. Review the financial statements to gain an understanding of what data to have available to produce the required footnote disclosures. Sample financial statements can be found on a nonprofit’s website,, or on the Federal Audit Clearinghouse website (if the nonprofit was required to have an audit performed in accordance with Uniform Guidance).

Once you’ve hired your firm of choice (and before any recurring engagement) you should:

8. Facilitate a meeting with the audit team and those individuals you have designated as your financial governance committee (audit committee, finance committee, board of directors, etc.) to set expectations and discuss specific risks related to your organization.

9. Hold a meeting with the audit team and your management to discuss timing and specific items that you will need to prepare based on the tailored approach prepared by the auditor. Finalize the timeline of all deliverables to ensure that your financial statements will be issued by the date required. Once you have received the specific list of items to be prepared by the organization, hold an internal meeting to assign responsibility for each task and consider how the information will be organized and reviewed prior to delivery to the auditor.

10. If your organization has inventory, ensure that you invite the audit team to the year-end count or the next scheduled perpetual count.

With careful consideration of these steps and allowing adequate time for your team to pull and organize this information, even a first-year audit should run smoothly.

And for recurring audits? In addition to Tips 8-10 above, consider:

  • After the initial audit, the relationship with your audit firm shouldn’t be just the yearly audit. Keep in touch throughout the year to discuss changes in your strategies, funding, processes, etc. so your auditors can advise if there are any potential accounting or compliance issues you should consider. A nonprofit’s financial statements are often public documents, so checking in on how new events and transactions may impact your audit and financial statement presentation can help mitigate unwanted surprises. Talk to your auditors about any changes in accounting controls or any new funding streams that might impact compliance requirements.
  • Stay informed about any changes to legislation, accounting pronouncements or other compliance updates that will impact your organization’s financial statement presentation or compliance rules. While it is often assumed that it is only the auditor’s job to keep up with changes, management is ultimately responsible for all the information in the financial statements and, therefore, should have a working knowledge of requirements. Keeping up with the changes will also ensure that the accounting system and records are set up to produce the required information the auditors will need to audit your organization’s adoption of new standards.
  • Stay organized! Create a logical electronic filing system to ensure that you can easily locate the information that has been requested and your team has prepared. Then, keep the files until the following year for reference.

The COVID-19 pandemic required many organizations to move office personnel to a remote environment. Some localities are still under shelter-in-place mandates, and some organizations have chosen not to bring the full team back into the office. In all likelihood a portion, if not all, of your audit in the coming months will be handled remotely. The keys to a successful audit under COVID-19 pandemic restrictions are communication and flexibility. Here are some additional considerations as you prepare for a remote audit:

  • Review what, if any, changes have occurred in the internal control processes to accommodate remote working. Are there changes in the check writing or depositing process? Are there changes to approval controls? Discuss these changes with your auditor ahead of the scheduled audit.
  • Discuss with your auditor what file repository system will be utilized for the remote sharing of data from your organization to your auditors in a secure manner. Ensure that the filing system will meet the cybersecurity requirements of your organization.
  • Discuss the timeline with your auditor well in advance this year. Consider if additional time may be required for your team to transfer physical files to electronic copies.
  • Consider using video technology to allow for the auditor to observe processes through the digital environment and allow for “in-person” meetings and interviews throughout the audit. An auditor could potentially even use digital methods to conduct a physical inventory count observation.
  • Consider safety protocols that your organization and the audit firm will require if in-person work or meetings are considered necessary. Ensure that each team understands the legal and organizational requirements for protective equipment and social distancing protocol.

The word audit can often be a source of fear and dread. However, if you follow the tips above, your organization can be audit ready. An organization that is well prepared will see the audit process as a helpful tool for financial health and not an exhaustive exercise in pulling data. Communication with your auditors has always been important but with the current COVID-19 restrictions both communication and flexibility will be even more critical to a smooth audit process.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2020). Copyright © 2020 BDO USA, LLP. All rights reserved.

FASB Issues ASU On Contributed Nonfinancial Assets

By Tammy Ricciardella, CPA

On September 17th, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU), 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets. This ASU is intended to increase transparency on how contributed nonfinancial assets (also referred to as gifts-in-kind) received by nonprofits are to be used and how they are valued.

The ASU was issued to address stakeholder concerns about how nonprofit entities report contributed nonfinancial assets. Stakeholders expressed a need for additional transparency surrounding the amount of contributed nonfinancial assets and how they are used in a nonprofit’s programs and activities. Others noted the need for clarity in how these contributed nonfinancial assets were valued.

Though the update does not change the current recognition and measurement requirements in generally accepted accounting principles (GAAP), which is included in Accounting Standards Codification (ASC) 958-605, Revenue Recognition, the ASU is intended to improve current GAAP through enhancements to presentation and disclosures of contributed nonfinancial assets.

The scope of the ASU is limited to gifts of nonfinancial assets. The term nonfinancial assets includes fixed assets such as land, buildings and equipment; the use of fixed assets or utilities, materials and supplies such as food, clothing or pharmaceuticals; intangible assets; recognized contributed services; and unconditional promises of those assets. Many nonprofit organizations rely on these contributions to conduct their programs and mission-related activities.

The ASU requires that a nonprofit present contributed nonfinancial assets as a separate line item in the statement of activities apart from contributions of cash or other financial assets.

The ASU requires the following information be disclosed related to the contributed nonfinancial assets:

  • The contributed nonfinancial assets recognized in the statement of activities disaggregated by categories that depict the type of contributed nonfinancial assets.
  • Each category of contributed nonfinancial assets recognized as noted above should disclose the following:
    • Qualitative information about whether the contributed nonfinancial assets were either monetized or utilized during the reporting period.

–  If utilized, a description of the programs or other activities in which those assets were used.

    • The nonprofit’s policy (if any) about monetizing rather than utilizing contributed nonfinancial assets.
    • A description of any donor restrictions associated with the contributed nonfinancial assets. An example of this would be if an entity received contributed pharmaceuticals, and the donor restricted these for use outside of the United States.
    • The valuation techniques and inputs used to arrive at a fair value measure in accordance with the requirements in ASC 820, Fair Value Measurements, at initial recognition.
    • The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient nonprofit is prohibited by a donor-imposed restriction from selling or using the contributed nonfinancial assets.

The amendments in the ASU should be applied on a retrospective basis and are effective for annual reporting periods beginning after June 15, 2021. Early adoption of the ASU is permitted.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2020). Copyright © 2020 BDO USA, LLP. All rights reserved.

President Trump Signs into Law CARES Act – Tax Impacts for Business, Charities and Individuals

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus (COVID-19). The CARES Act is the third round of federal government aid related to COVID-19. We have summarized the top provisions in the new legislation below, with more detailed alerts on individual provisions to follow. Click here for a link to the full text of the bill.

2020 Recovery Refund Checks for Individuals

The CARES Act provides eligible individuals with a refund check equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child. The refund begins to phase out if the individual’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit is completely phased out for individuals with no qualifying children if their AGI exceeds $99,000 ($198,000 for joint filers and $136,500 for head of household filers).

Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, or trusts. Eligible individuals and qualifying children must all have a valid social security number. For married taxpayers who filed jointly with their most recent tax filings (2018 or 2019) but will file separately in 2020, each spouse will be deemed to have received one half of the credit.

A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) who has lived with the taxpayer for more than half of the year, and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.

The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their 2018 or 2019 tax return, as appropriate. If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.

Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Other individuals may be required to file a return to receive any benefits.

The CARES Act provides that the IRS will make automatic payments to individuals who have previously filed their income tax returns electronically, using direct deposit banking information provided on a return any time after January 1, 2018.

Charitable Contributions

Above-the-line deductions: Under the CARES Act, an eligible individual may take a qualified charitable contribution deduction of up to $300 against their AGI in 2020. An eligible individual is any individual taxpayer who does not elect to itemize his or her deductions. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) that is made to certain publicly supported charities.

This above-the-line charitable deduction may not be used to make contributions to a non-operating private foundation or to a donor advised fund.

Modification of limitations on cash contributions: Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any such contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the five succeeding years.

The CARES Act temporarily suspends the AGI limitation for qualifying cash contributions, instead permitting individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as a deduction for the contribution year. Any excess is carried forward as a charitable contribution in each of the succeeding five years. Taxpayers wishing to take advantage of this provision must make an affirmative election on their 2020 income tax return.

This provision is useful to taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. As with the aforementioned above-the-line deduction, contributions to non-operating private foundations or donor advised funds are not eligible.

For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.

Compensation, Benefits, and Payroll Relief

The law temporarily increases the amount of and expands eligibility for unemployment benefits, and it provides relief for workers who are self-employed. Additionally, several provisions assist certain employers who keep employees on payroll even though the employees are not able or needed to work. The cornerstone of the payroll protection aid is a streamlined application process for SBA loans that can be forgiven if an eligible employer maintains its workforce at certain levels. Additionally, certain employers affected by the pandemic who retain their employees will receive a credit against payroll taxes for 50% of eligible employee wages paid or incurred from March 13 to December 31, 2020. This employee retention credit would be provided for as much as $10,000 of qualifying wages, including health benefits. Eligible employers may defer remitting employer payroll tax payments that remain due for 2020 (after the credits are deducted), with half being due by December 31, 2021, and the balance due by December 31, 2022. Employers with fewer than 500 employees are also allowed to give terminated employees access to the mandated paid federal sick and child care leave benefits for which the employer is 100% reimbursed by the government through payroll tax credits if the employer rehires the qualifying employees.

Any benefit that is driven off the definition of “employee” raises the issue of partner versus employee. The profits interest member that is receiving a W-2 may not be eligible for inclusion in the various benefit computations.

Eligible individuals can withdraw vested amounts up to $100,000 during 2020 without a 10% early distribution penalty, and income inclusion can be spread over three years. Repayment of distributions during the next three years will be treated as tax-free rollovers of the distribution. The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000 for the first 180 days after enactment, and the payment dates for any loans due the rest of 2020 would be extended for a year.

Individuals do not have to take their 2020 required minimum distributions from their retirement funds. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers.

Two long-awaited provisions allow employers to assist employees with college loan debt through tax free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.

Deferral of Net Business Losses for Three Years

Section 461(l) limits non-corporate taxpayers in their use of net business losses to offset other sources of income. As enacted in 2017, this limitation was effective for taxable years beginning after 2017 and before 2026, and applied after the basis, at-risk, and passive activity loss limitations. The amount of deductible net business losses is limited to $500,000 for married taxpayers filing a joint return and $250,000 for all other taxpayers. These amounts are indexed for inflation after 2018 (to $518,000 and $259,000, respectively, in 2020). Excess business losses are carried forward to the next succeeding taxable year and treated as a net operating loss in that year.

The CARES Act defers the effective date of Section 461(l) for three years, but also makes important technical corrections that will become effective when the limitation on excess business losses once again becomes applicable. Accordingly, net business losses from 2018, 2019, or 2020 may offset other sources of income, provided they are not otherwise limited by other provisions that remain in the Code. Beginning in 2021, the application of this limitation is clarified with respect to the treatment of wages and related deductions from employment, coordination with deductions under Section 172 (for net operating losses) or Section 199A (relating to qualified business income), and the treatment of business capital gains and losses.

Section 163(j) Amended for Taxable Years Beginning in 2019 and 2020

The CARES Act amends Section 163(j) solely for taxable years beginning in 2019 and 2020. With the exception of partnerships, and solely for taxable years beginning in 2019 and 2020, taxpayers may deduct business interest expense up to 50% of their adjusted taxable income (ATI), an increase from 30% of ATI under the TCJA, unless an election is made to use the lower limitation for any taxable year. Additionally, for any taxable year beginning in 2020, the taxpayer may elect to use its 2019 ATI for purposes of computing its 2020 Section 163(j) limitation. This will benefit taxpayers who may be facing reduced 2020 earnings as a result of the business implications of COVID-19. As such, taxpayers should be mindful of elections on their 2019 return that could impact their 2019 and 2020 business interest expense deduction. With respect to partnerships, the increased Section 163(j) limit from 30% to 50% of ATI only applies to taxable years beginning in 2020. However, in the case of any excess business interest expense allocated from a partnership for any taxable year beginning in 2019, 50% of such excess business interest expense is treated as not subject to the Section 163(j) limitation and is fully deductible by the partner in 2020. The remaining 50% of such excess business interest expense shall be subject to the limitations in the same manner as any other excess business interest expense so allocated. Each partner has the ability, under regulations to be prescribed by Treasury, to elect to have this special rule not applied. No rules are provided for application of this rule in the context of tiered partnership structures.

Net Operating Losses Carryback Allowed for Taxable Years Beginning in 2018 and Before 2021

The CARES Act provides for an elective five-year carryback of net operating losses (NOLs) generated in taxable years beginning after December 31, 2017, and before January 1, 2021. Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable once made. In addition, the 80% limitation on NOL deductions arising in taxable years beginning after December 31, 2017, has temporarily been pushed to taxable years beginning after December 31, 2020. Several ambiguities in the application of Section 172 arising as a result of drafting errors in the Tax Cuts and Jobs Act have also been corrected. As certain benefits (i.e., charitable contributions, Section 250 “GILTI” deductions, etc.) may be impacted by an adjustment to taxable income, and therefore reduce the effective value of any NOL deduction, taxpayers will have to determine whether to elect to forego the carryback. Moreover, the bill provides for two special rules for NOL carrybacks to years in which the taxpayer included income from its foreign subsidiaries under Section 965. Please consider the impact of this interaction with your international tax advisors. However, given the potential offset to income taxed under a 35% federal rate, and the uncertainty regarding the long-term impact of the COVID-19 crisis on future earnings, it seems likely that most companies will take advantage of the revisions. This is a technical point, but while the highest average federal rate was 35% before 2018, the highest marginal tax rate was 38.333% for taxable amounts between $15 million and $18.33 million. This was put in place as part of our progressive tax system to eliminate earlier benefits of the 34% tax rate. Companies may wish to revisit their tax accounting methodologies to defer income and accelerate deductions in order to maximize their current year losses to increase their NOL carrybacks to earlier years.

Alternative Minimum Tax Credit Refunds

The CARES Act allows the refundable alternative minimum tax credit to be completely refunded for taxable years beginning after December 31, 2018, or by election, taxable years beginning after December 31, 2017. Under the Tax Cuts and Jobs Act, the credit was refundable over a series of years with the remainder recoverable in 2021.

Technical Correction to Qualified Improvement Property

The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries. Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return and should consider whether they can file Form 4464 to quickly recover overpayments of 2019 estimated taxes. Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible. For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate NOLs that can be carried back five years under the new NOL provisions of the CARES Act to taxable years before 2018 when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%. With the taxable income limit under Section 172(a) being removed, an NOL can fully offset income to generate the maximum cash refund for taxpayers that need immediate cash. Alternatively, in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation as a favorable Section 481(a) adjustment.

Effects of the CARES Act at the State and Local Levels

As with the Tax Cuts and Jobs Act, the tax implications of the CARES Act at the state level first depends on whether a state is a “rolling” Internal Revenue Code (IRC) conformity state or follows “fixed-date” conformity. For example, with respect to the modifications to Section 163(j), rolling states will automatically conform, unless they specifically decouple (but separate state ATI calculations will still be necessary). However, fixed-date conformity states will have to update their conformity dates to conform to the Section 163(j) modifications. A number of states have already updated during their current legislative sessions (e.g., Idaho, Indiana, Maine, Virginia, and West Virginia). Nonetheless, even if a state has updated, the effective date of the update may not apply to changes to the IRC enacted after January 1, 2020 (e.g., Arizona). A number of other states have either expressly decoupled from Section 163(j) or conform to an earlier version and will not follow the CARES Act changes (e.g., California, Connecticut, Georgia, Missouri, South Carolina, Tennessee (starting in 2020), Wisconsin). Similar considerations will apply to the NOL modifications for states that adopted the 80% limitation, and most states do not allow carrybacks. Likewise, in fixed-dated conformity states that do not update, the Section 461(l) limitation will still apply resulting in a separate state NOL for those states. These conformity questions add another layer of complexity to applying the tax provisions of the CARES Act at the state level. Further, once the COVID-19 crisis is past, rolling IRC conformity states must be monitored, as these states could decouple from these CARES Act provisions for purposes of state revenue.