On September 7, the IRS issued proposed, temporary and final rules implementing the redesigned Form 990 for tax year 2008, moving to eliminate the advance ruling process for new public charities. The rules change the public support computation period for exempt organizations from four years to five and clarify that support must be reported using the organization’s overall method of accounting. In addition, they allow for new threshold amounts for reporting compensation, require that compensation be reported on a calendar year basis, and modify the scope of organizations subject to information reporting requirements on a substantial contraction, or change in net assets. The new rules will streamline the approval process for organizations seeking taxexempt status as publicly supported charities. Written and electronic comments on the proposed rules must be received by November 10. In addition to the streamlined approval process, the new regulations include other modifications necessary to implement the redesigned Form 990, which organizations will begin filing for their 2008 tax year.
Subsequent Substantiation, Form 8734 Eliminated: The new regulations eliminate the advance rulings that granted public charity status for an initial fiveyear period but required exempt organizations to demonstrate, after the initial period, that they in fact received a substantial part of their support from public sources to receive a final determination letter. This elimination was possible because of the redesign of Form 990, which enhances transparency for exempt organizations. Previously when a new charity was formed it generally attempted to meet the public support test so that it could be recognized as a public charity rather than a private foundation, which is subject to more restrictions on operations. If it was successful, it would receive an advance ruling stating that it would be treated as a public charity for the first five years of its existence. At the end of that time it had to file Form 8734 in an attempt to finally establish that it met the public support test by setting forth the numbers to prove it. Under the new rules, it is now a five-year test and the need for an advance ruling and filing of Form 8734 has been eliminated.
Reporting to Match Bookkeeping: The other significant change is in the method of computing public support. Previously, public support had to be reported on a cash basis but, because the IRS wants reporting to be consistent with how books are kept, organizations that keep their books on an accrual basis now will have to report on that basis. The benefit of the new test is that all the information for calculating public support will be on the Form 990, with no requirements of a separate form.