Reporting tax-exempt bond liabilities, (bonds issued by the organization on behalf of a state or local government unit, or by the state or local government unit for the organization), are recorded on Line 64a of Part IV Balance Sheet of the current Form 990 and requires an additional attachment. The specific instructions for the attachment requires showing for each separate issue:
- the purpose of the issue;
- the amount outstanding;
- the unexpended bond proceeds, and
- whether any portion of any bond-financed facility was used by a third party (other than a governmental unit or section 501(c)(3) organization), and if so the percentage of space used by the third party.
Although this required attachment seems relatively straightforward, The IRS has found significant noncompliance in both the record keeping and retention of records relating to these bonds. This has made it difficult for the IRS to determine if the bonds remain qualified (a tax -exempt bond the proceeds of which are used by the 501(c)(3) organization in furtherance of its charitable purpose) throughout their term, from the information filed in the 990. The other IRS concern not addressed in the current Form 990, is arbitrage (profits earned from the investment of tax-exempt bond proceeds in higher yield taxable securities) and circumventing the arbitrage rebate (all net earnings above the bond yield must be remitted to the federal government. The rebate is a 100% tax on this profit). Schedule K was designed to address these issues.
If an organization checks Yes to any of questions 24a through 24d of Form 990, Part IV, Checklist of Required Schedules or enters an amount on either Form 990 Part VIII Statement of Revenue Line 4 or Form 990 Part X, Balance Sheet, Line 20 they are instructed to complete Schedule K. The new schedule consists of four parts, three of which are optional for 2008 to give entities time to put in place the necessary record keeping and record retention processes. The accompanying set of instruction contains a list of specific terms along with full definitions rather then just references to the Regulations or Code.
- Part I, Bond Issues(required in 2008), requests information about all of an organization's outstanding bond issues with principal amounts greater than $100,000 and issued after December 31, 2002; CUSIP and issuer EIN are now specified columns,
- Part II, Proceeds (optional in 2008), requests information about the use or investment of bond proceeds in far greater detail than previously requested. Questions include whether there are portions of the proceeds in Refunding or Defeasance Escrow, the amount of expenditures from proceeds in Working Capital or Capital Expenditures accounts as well as the amount of unspent proceeds;
- Part III, Private Business Use(optional in 2008), requests specific information about management or service contracts, research agreements or lease agreements that may result in private business use. There are also questions pertaining to possible unrelated business income as well as the currently required reporting of the percentage of use by private entity;
- Part IV, Arbitrage(optional in 2008) covers the hereto-for untouched area, requesting information about compliance with the arbitrage rebate filings Form 8038-T, variable rate issues, qualified hedges and investments in a GICs(guaranteed investment contracts).
In short, the new Schedule K will require much more time in record keeping, record retention and reporting for tax-exempt bond liabilities. But there is some transitional relief in the one year delay of completing parts pertaining to Proceeds, Private Use and Arbitrage reporting; the $100,000 outstanding principal threshold and limiting reporting to bonds issued after December 31, 2002. The clear and concise instructions along with the new IRS trend to include within the instructions specific definitions in easier to understand terms should all help mitigate the pain of compliance.
Subrina
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