The Top 5 Audit, Accounting, and Tax Updates for Nonprofits for 2024

There’s often new audit, accounting, and tax regulations nonprofits should know, and 2024 is no different on that front.

What’s new? The Financial Instruments Credit Losses standard (ASU 2016-13) will change the way organizations look at their reserves and it will have a widespread applicability.

Also, the new auditing standards (SAS 143 and 145) will impact financial statement audits, requiring enhanced risk assessments, a deeper understanding of accounting estimates, and a more in-depth understanding of the internal technology environment.

The IRS is also conducting broad audits that could cascade into new issues, requiring organizations to be more prepared and proactive. In good news, the new Inflation Reduction Act can provide tax credits for nonprofits undertaking green energy projects even if you don’t have taxable income.

Read on to explore these and other top audit and tax updates for nonprofits for 2024.

Accounting standards update and implications for nonprofits

The recent audit standards update has brought significant changes, including new accounting standards and their implications for nonprofits. The update — effective for years beginning after December 15, 2022 — introduces ASU 2016-13, focusing on Financial Instruments Credit Losses, commonly known as CECL. This standard may impact organizations with trade receivables and financing receivables, necessitating a shift from a rear-looking to a forward-looking approach in the development of valuation reserves.

ASU 2016-13 excludes pledges receivable and items recorded at fair value, providing some relief for nonprofits. ASU 2023-08 addresses accounting for crypto assets, categorizing them as intangible assets and requiring them to be recorded at fair value, with specific disclosure requirements. Also, ASU 2023-01 provides practical expedients for leases between entities under common control, impacting lease accounting and leasehold improvements amortization.

Navigating recent IRS audit activities and proactive measures

Recent IRS audit activities have shown a shifting approach, with auditors now conducting in-person visits and employing broader, more comprehensive audit strategies. Understanding internal controls and being prepared with necessary documentation is crucial for organizations facing potential audits.

Proactive measures can help organizations anticipate and mitigate the impact of IRS audits. Having key documents readily available — such as articles of incorporation, bylaws, and board minutes — is essential for a smooth audit process.

Additionally, complying with governance and transparency requirements can contribute to a favorable audit outcome. While recent IRS compliance check letters serve as a gentle reminder, organizations can benefit from proactive measures such as reviewing compensation arrangements to preempt potential issues.

The IRS has been focusing on employment classification, especially in the context of employee versus the independent contractor designation. The IRS is scrutinizing job descriptions, conflict of interest policies, and compensation policies to verify compliance. This heightened scrutiny is attributed to the increased emphasis on employment tax issues, with a particular focus on statutory employees and the common-law employee classification.

By staying prepared and maintaining robust internal controls, organizations can navigate IRS audit activities with confidence and demonstrate their commitment to compliance and transparency.

IRS examinations and determinations

The IRS receives a significant number of tax-exempt status applications annually. During the most recent fiscal year, over 128,000 applications were submitted, and approximately 120,000 were processed and closed. These applications include:

• Form 1023, which is the application for 501(c)(3) status,
• Form 1024 for non-501(c)(3) organizations, and
• Form 1024A for 501(c)(4) organizations.

The IRS conducted a total of 2,500 examinations, resulting in the closure of 2,400 cases with an overall change rate of about three-fourths of those exams. These statistics provide insight into the rigorous examination process tax-exempt organizations undergo. It's important for organizations to be aware of these figures as they reflect the level of scrutiny and potential impact of IRS examinations on tax-exempt entities.

Tax credits for climate-friendly projects

The Inflation Reduction Act presents a landmark climate legislation focusing on promoting domestic content labor and paying workers prevailing wages to create new, good-paying jobs in the United States. This act offers tax credits ranging from 6% to 70% for eligible investments, and what's especially appealing for nonprofits is these credits are available even if you don’t have taxable income.

The tax credits are applicable to investments placed into service after December 31, 2022, making them effective for tax years beginning on or after January 1, 2023. Nonprofits can elect for direct payment, treating the investment credit as a tax payment itself.

The Form 990-T, typically filed for organizations with unrelated business income, will now encompass these tax credits. Additionally, the pre-filing registration tool with the IRS was launched in late December 2023, offering a streamlined process for organizations to initiate tax credit claims.

Navigating state and local tax considerations

The impact of remote workforce on state tax nexus is a significant consideration for nonprofits in today's evolving work landscape. With an increasing number of employees working remotely from various states, organizations must be aware of the potential nexus implications, which could lead to tax obligations. It’s crucial for nonprofits to apply for state-level exemptions when expanding their presence into new states.

While federal tax-exempt status is essential, it does not automatically guarantee exemption from state taxes. Proactive application for state-level exemptions is vital to avoid unexpected tax liabilities.

Another important requirement for nonprofits to know is collecting and remitting sales tax. Even as tax-exempt organizations, nonprofits may still be obligated to collect and remit sales tax on certain products and services they offer. Understanding the nuances of sales tax requirements and meeting state regulations is essential for maintaining tax-exempt status and adhering to state tax laws.

How we can help

As usual, the IRS and the Financial Accounting Standards Board are keeping busy, but we’re here to help your nonprofit understand and comply with the new regulations and opportunities.

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