161: REFRESH Five Tax Traps for Business Lawyers Advising Nonprofit Organizations

I'm Cynthia Rowland, and this is Episode 161 of EO Radio Show.

This is the second refresh of Episode 19, which is titled Five Tax Traps for Business Lawyers Advising Nonprofit Organizations.

It was first released in October of 2022 and then refreshed in June 2025.

The legal landscape has shifted enough in the past year to warrant another pass.

Let me walk you through what's new.

These aren't new traps per se, just new developments that further illustrate why it's important to stay abreast of developments in these landscapes where these traps catch unsuspecting travelers.

The original episode is still an excellent reminder of issue spotting essential to competent counsel of charities.

The five major traps described in the episode are federal taxes that apply to tax-exempt organizations, potential liability of volunteer officers and directors for failure of the charity to ensure withhold employment taxes are paid to the IRS, advocacy, lobbying, and political campaign intervention rules, insider compensation rules, and federal Form 990 filing obligations.

Some recent developments add interesting current context to how these traps can snag an unwary organization.

First, the One Big Beautiful Bill Act, OBBBA, became law on July 4, 2025.

Our number one tax trap, that is federal taxes on charities, saw some drama in the past year related to that act and one real change.

On unrelated business taxable income, the sector dodged a bullet.

Earlier drafts of the OBVBA would have expanded the tax to royalties from name or logo licensing and would have resurrected the parking and transit fringe benefit tax.

Both of these were removed from the final bill, but they advanced far enough that we shouldn't be surprised if they resurface.

However, the Act did expand an excise tax applicable to some charities.

The OB-BBA expanded the Section 4960 excise tax from just the five highest paid employees to every employee earning over $1 million.

The IRS followed up with Notice 2026-36, which provides interim guidance on the broader definition of covered employee.

So the takeaway is, if your client is a hospital, university, or any large nonprofit with multiple executives above that million-dollar threshold, this is an immediate compliance issue.

Another excise tax also had a bit of drama in early provisions, where the tiered excise tax on private foundation net investment income, which would have rates to as high as 10%, was removed in the end.

The flat 1.39% excise tax on investment income of private foundations survives, at least for now.

On political activity, which is part of Trap 3 of our original episode, the provision in the Internal Revenue Code Section 501c3 that prohibits all charities from intervening in candidate campaigns, known colloquially as the Johnson Amendment, remains fully in effect for the 2026 midterms.

Despite litigation and a lot of rhetoric in the past few years around whether the prohibition can apply to churches, the leading case, National Religious Broadcasters v. Besant, was dismissed on March 31, 2026, and a proposed settlement that might have affected enforcement of the provision never took effect.

New guidance on the issue is on the 2025-2026 Priority Guidance Plan published by the IRS and Treasury, but for now, the current prohibition applies as it has for decades.

With that being said, in the current environment, that prohibition is not enforced against churches.

And on federal reporting, that's our original tax trap number five, Treasury announced on April 23rd of 2026 that it will revise Form 990 to require more detailed disclosure of government grants and fiscal sponsorship arrangements.

Proposed regulations are expected.

If your client receives government money or fiscally sponsors projects, you already are probably well aware of these issues.

So for business lawyers helping a charity or nonprofit leaders who want to understand what their lawyers should be looking for, here's the original episode with the five tax traps that will always need to be watched for.