Many Not-For-Profits (NFPs) unnecessarily make disclosures about unrecognized tax benefits. Perhaps this happens because of confusion around the difference between a tax position and an unrecognized tax benefit, or because of a recently withdrawn AICPA Technical Question and Answer (Q&A).
All NFPs have tax positions. Tax positions are decisions taken in a previously filed income tax return or expected to be taken in a future return that are reflected in current or deferred income tax assets and liabilities. In contrast, many, if not most, NFPs do not have unrecognized tax benefits.
An unrecognized tax benefit is a tax position that lowers the NFP’s income taxes but that is too uncertain to record in the financial statements. The two most common tax positions of an NFP – its tax-exempt status and classification of its activities as related to the exempt purpose – are recognized.
NFPs “recognize” the benefit of their tax-exempt status by not recognizing tax expense. Many NFPs determine that none of their activities are subject to unrelated business income tax, and they “recognize” the benefit of that position by not recognizing income tax on their activities.
Unless the NFP is in danger of losing its tax exemption, is taking questionable positions regarding which of its activities are or may be unrelated, or is making aggressive allocations related to taxable revenues and deductible expenses, the NFP probably doesn’t have unrecognized tax benefits.
An NFP that has some activities subject to unrelated business income tax may have unrecognized tax benefits. NFPs with activities subject to income tax take tax positions that include:
- Which of its activities are related to its exempt purpose.
- The allocation of revenue between activities that relate to its exempt purpose and those that are allocated to unrelated business income.
- The allocation of expenses between activities that relate to its exempt purpose and those that are allocated to unrelated business activities.
An NFP can recognize the tax benefit of a tax position only if it is more likely than not that the tax position will be sustained on its technical merits upon IRS examination. Thus, if an NFP takes a position (or expects to take a position) in its Form 990-T that is not “more likely than not” to be sustained, the NFP cannot recognize the benefit of that position in its financial statements. Until one of the following events occurs, the NFP has unrecognized tax benefits, and disclosures about unrecognized tax benefits are required:
- The more-likely-than-not recognition threshold is met by the reporting date.
- The tax position is effectively settled through examination, negotiation or litigation.
- The statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.
An NFP is required to disclose tax years that remain subject to examination only if it has unrecognized tax benefits. Q&A section 5250.15, which had required that disclosure even if the entity had no uncertain tax positions, was withdrawn in March 2015 after FASB members confirmed that the basis for the conclusions section of FASB ASU No. 2009-06, Income Taxes (Topic 740) – Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities, stated that no disclosure would be required if management determines there are no unrecognized tax benefits to record, because requiring such a disclosure would set a precedent for requiring disclosure for all accounting standards for which there was no material effect on the financial statements. As a result, NFPs with no uncertain tax positions need not disclose open tax years.
The following additional tax disclosures are sometimes seen in the financial statements of NFPs, although they also are not required:
- A disclosure that the NFP has no material uncertain tax positions.
- A statement that the NFP believes that it has appropriate support for any tax positions taken.
- A statement that the NFP believes that its income tax filing positions will be sustained upon examination and does not anticipate any adjustments that would result in a material adverse effect on the NFP’s financial condition, results of operations, or cash flows.
Eliminating unnecessary disclosures about tax matters is a key step to eliminating disclosure overload in the financial statements.