Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please Note: Our office will be closed Wednesday, April 16th.
Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please Note: Our office will be closed Wednesday, April 16th.
Your 501(c)(3) organization generally is required to pay tax on income that isn’t related to its main purpose — even if that income keeps the not-for-profit afloat. This unrelated business income (UBI) is something to watch closely, because if your nonprofit is ever audited, the IRS will likely scrutinize your records to see whether you’ve accurately reported UBI.
If you haven’t reported UBI correctly, your organization may be responsible for back taxes, interest and penalties that can easily go into the thousands. And worse, if the IRS determines that your not-for-profit has significantly strayed from its mission because of UBI-generating activities, your tax-exempt status could be jeopardized. Fortunately, if you understand and follow the rules, you can avoid such scenarios.
According to the IRS, an activity generally is an unrelated business and its income subject to UBI tax if the activity:
Typically, all three situations must exist for the income to be considered UBI.
The types of activities that can generate UBI sometimes fall under the fundraising umbrella and include the following:
Sale of products unrelated to your purpose. Examples might include sales from a hospital gift shop or a zoo restaurant. To determine if the revenue is UBI, ask:
If you answer “yes” to these questions, you’ll likely need to report the income from the activity as UBI.
Sale of advertising space. Do you sell ad space in your organization’s journal, magazine or newsletter or on its website? Language that induces the reader to buy or use a product or service typically is considered advertising — for instance, a description of the product’s or service’s quality or a favorable comparison to a similar product or service. And the income from that activity is considered UBI. Conversely, a brief acknowledgment — listing, for instance, the supporter’s name and logo in a program — probably isn’t advertising, but rather is sponsorship and considered a donation.
Sale of unrelated services. In an online tutorial, the IRS uses the example of parking lots to explain this type of UBI. If an organization owns a parking lot and opens it regularly to the general public, the parking fee income is taxable. That’s because the activity — charging a fee for public parking — isn’t substantially related to the not-for-profit’s exempt purpose.
But, if only members and visitors use the parking lot while participating in the organization’s activities, the parking fee income isn’t taxable. The excellent tutorial can be found at http://www.stayexempt.org/VirtualWorkshop.aspx.
These are only some of the activities that can generate UBI. Income from certain investments, from selling membership lists and from gaming activities (see the sidebar “It’s all in the game”) also can produce UBI.
Keep in mind that there are many exceptions to the rules — for example, when your volunteers run the activity. According to the IRS, income from any trade or business where uncompensated volunteers perform 85% of the work is exempt from UBI tax.
A transaction’s structure also can exclude the resulting income from taxation. While being paid to directly promote products compatible with your mission probably will result in UBI, receiving royalties for licensing others to use your name or logo to promote such products may avoid it.
Other situations in which your nonprofit’s income may be exempt from tax include when the merchandise you sell is largely donated, such as in a book sale, or when gross income from the activity is less than $1,000. See IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations, for more exemptions.
These examples of activities that produce UBI are straightforward. But your not-for-profit may sponsor activities that seem to fall into a gray area, making them more difficult to evaluate. For instance, an exception that often applies to museum restaurants is when the nonprofit effectively documents that the operation is held for the “convenience of the members or attendees.” Additionally, fundraising activities often are exempt because they aren’t held regularly.
Your CPA can help you to analyze and quantify potential unrelated business activities and allocate expenses against this income. With proper planning, UBI often can be avoided and taxes reduced.
If you’re like many nonprofits, you probably have an accountable plan for employee business expense reimbursements. If you don’t, you’re at risk for having to add reimbursements to your employees’ wages for income tax and Social Security tax purposes. But do you have the necessary policies and procedures in place to comply with IRS requirements? Here are eight tips for making sure that your plan is beyond reproach.
Just because employees submit business expense records, it doesn’t mean the employer can reimburse them tax free. But a nonprofit isn’t required to report the reimbursed expenses as earnings on the employee’s W-2 form if it has an accountable plan in place. The IRS requires that all expenses covered in the plan have a business connection and be “reasonable.”
While an accountable plan isn’t required to be in writing, a formally established plan makes it easier for the nonprofit to prove its validity to the IRS if ever challenged. A written plan also gives the organization a structure for describing its requirements for expense reimbursement.
If an expense qualifies as a business deduction for an employee, it also can qualify as a tax-free reimbursement under an accountable plan. For meals and entertainment, the plan may reimburse expenses at 100% that would be deductible by the employee only at 50%. You must identify the reimbursement or expense payment, and keep these amounts separate from other amounts, such as wages. For 2010, you can reimburse employees up to 50 cents for every mile they put on their vehicles for business purposes.
An accountable plan must reimburse expenses in addition to an employee’s regular compensation. No matter how informal the nonprofit, it can’t substitute tax-free reimbursements for compensation the employees otherwise would have received. For example, assume an employee receives $200 for a day’s work — whether traveling or not — and on a business trip incurs $50 in reimbursable expenses. The employer can’t treat $50 as tax-free reimbursement and report $150 as taxable income.
Even if you give your employees a budget for expenses, if the funds aren’t used for qualified expenses it will invalidate the plan. And an invalid plan means that the employees’ legitimately documented reimbursed business expenses would be taxable.
This begs the question, what isn’t reasonable? Let’s say an organization reimburses an employee at 70 cents per mile, rather than the allowed 55.5 cents per mile. (Note, this rate went into effect July 1, 2011; the rate was 51 cents per mile from Jan. 31, 2011 through June 30, 2011.) The IRS would consider the extra 14.5 cents excessive and treat it as taxable income subject to wage withholding. Also, an employer can’t reimburse the employee more than what he or she paid for any business expense.
The IRS provides three conditions that must be satisfied in an accountable plan. The expense must be 1) ordinary (reasonable) and necessary, 2) incurred while away from the general area of the employee’s tax home for a substantial period, and 3) incurred in the pursuit of business.
The IRS requires that the nonprofit keep these records for business expenses that are reimbursed:
IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, provides more details on this topic.
Document all lodging expenses with a receipt, unless your nonprofit uses a per diem plan. Require employees to submit receipts for any other expenses of $75 or more and for all lodging. Credit card statements may be used to provide key elements of your documentation, such as the place and date of the expense, and employees must supplement the statement with documentation of other elements.
The IRS has set standard per day amounts that taxpayers may use as an optional deduction for meal expenses incurred while away from home on business travel. U.S. rates are available in IRS Publication 1542, Per Diem Rates, which also includes the IRS per day amounts for combined meal and lodging expenses. When using a per diem for travel — or mileage for vehicle usage — an employer may adopt a lower amount than the IRS maximum.
An account book, diary, log, trip sheet or similar record may be used to substantiate a vehicle’s business use. This is the best way for the employee to maximize and protect this deduction.
June 29, 2011
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provided many answers regarding the estate tax, but, unfortunately, the act created additional questions as well. With certain estate tax law provisions scheduled to expire after 2012, estate planning uncertainty remains. This article explains how making lifetime gifts can take advantage of the current high exemption amount and low tax rate and details ways to add flexibility to an estate plan to prepare for potentially lower exemptions and higher rates in 2013.
In response to rising gasoline prices, the IRS has raised the standard mileage rate for business use of an automobile from 51 cents per mile to 55½ per mile, effective July 1. The medical and moving standard mileage rate is increasing to 23½ per mile, also on July 1.
The new optional standard mileage rates will apply until superseded by future guidance and can be used by taxpayers to calculate the deductible costs of operating an automobile. Alternatively, taxpayers can instead use their actual costs, but must maintain adequate records and be able to substantiate their expenses.
The standard mileage rate for services to charitable organizations is set by statute at 14 cents per mile and remains unchanged.
Click Here to read the IRS Announcement in full
June 8, 2011
Two positive changes are coming to Colorado employers and retail businesses on July 1, 2011: the FUTA tax rate decreases and the state sales tax service fee is restored.
If you are an employer, you should be aware that the Federal Unemployment Tax Act (FUTA) tax rate is decreasing effective July 1, 2011.
FUTA-covered employers currently are assessed a tax amounting to 6.2% on the first $7,000 of wages paid to each employee during a calendar year.
Generally, employers can take a credit against their FUTA tax for amounts paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages. If an employer is entitled to the maximum 5.4% credit, the FUTA tax rate after credit is currently 0.8%.
On July 1, 2011, the FUTA tax rate is scheduled to decrease to 6.0%. For employers who can take the maximum credit of 5.4%, the FUTA tax rate will decrease to 0.6%.
The Colorado state sales tax Service Fee (also known as the Vendor's Fee) has been restored and the rate is now 2.22%. The fee may be claimed on timely filed and paid sales tax returns submitted on or after July 1, 2011 beginning with sales tax returns for June 2011 and 2nd quarter 2011 due on July 20, 2011.
Businesses with only one location will receive new DR 0100 coupon books in early July. If the new booklet does not arrive in time to prepare and file the return, change the state and district column vendor fee rates on the existing coupon to 2.22% (.0222).
Multiple location retailers, seasonal filers, and annual filers will receive pre-printed forms that will have the 2.22% rate. XML or Excel spreadsheet filers need to verify that their rate for state, RTD/CD/FD/BD has been changed to reflect the service fee change for the June 2011 or 2nd quarter 2011 returns due on July 20, 2011.
If your nonprofit chooses to engage in some lobbying, make sure that you follow IRS rules. Straying from the requirements could jeopardize your tax-exempt status. In addition to tax issues, federal and some state governments regulate organizations that lobby. While there are exemptions for some nonprofits and small amounts of lobbying, consult with your attorney about your specific requirements.
Part of playing it safe is knowing the difference between lobbying and advocacy. Lobbying is defined as a communication that attempts to change particular legislation. Advocacy, on the other hand, promotes general causes and issues. Nonprofits may do unlimited advocacy work, but the IRS limits the extent of lobbying activities.
Lobbying always involves advocacy, but advocacy doesn’t necessarily involve lobbying. The key to determining whether an activity is considered lobbying or advocacy depends in part on whom you’re trying to influence: Does the audience of your lobbying efforts make the laws or simply follow and enforce them? Do you want these individuals to vote a certain way on proposed legislation or simply be more aware of issues?
If your audience makes laws and you’re attempting to change legislation by encouraging these lawmakers to vote a certain way, it’s lobbying. If, on the other hand, you’re speaking with an administrative official or other non-lawmaking individual or group about a broad policy change, it’s advocacy.
Keep in mind that promoting a point of view and providing public education aren’t considered lobbying activities — even if you’re speaking with a public official. The discussion crosses the line only when specific legislation is discussed or you urge a particular vote.
Nonprofits often shy away from lobbying for fear of losing their tax-exempt status. And some organizations worry they don’t have the proper resources, time or qualifications to lobby.
But the fact is that nonprofits can lobby without endangering their tax-exempt status and without major financial resources or expert assistance. The Center for Lobbying in the Public Interest suggests that even small nonprofits can make an impact by devoting as little as three hours a week to the endeavor.
The IRS evaluates lobbying based on whether a nonprofit chooses to report its activities under the 1976 lobby law or uses the “no substantial part” test. The lobby law provides nonprofits with a clearly defined set of rules, and requires organizations to file Form 5768, known as the “h” election. The “no substantial part” rule is more vague and subject to interpretation.
If, for example, an organization chooses to use the lobby law, it may spend 20% of its first $500,000 in annual expenditures on lobbying tax free. This percentage decreases as annual expenditures increase, and annual nontaxable lobbying expenses are capped at $1 million. An excise tax will apply when spending limits are exceeded.
If a nonprofit doesn’t report lobbying under the 1976 law, it must meet the “no substantial part” test, which stipulates that nonprofits can spend only an insubstantial amount of their resources on lobbying. The specific dollar amount isn’t defined, but courts have ruled that more than 5% of an organization’s budget, time and effort is substantial. Most organizations, therefore, aim for a percentage below 5%.
Lobbying can help you get your organization’s voice heard and raise public awareness of your mission. Some social goals can only be fully addressed by changes in law, which may be encouraged by lobbying. If you strictly follow IRS rules, you can accomplish these goals without putting your tax-exempt status in danger.
Unless you’re a small nonprofit with no outside audit, it’s likely that your organization has an audit committee. No matter how long it’s been up and running, the board of directors should monitor the committee’s performance.
The audit committee’s main responsibilities are to assist the board in its oversight of the organization’s processes for financial reporting, internal controls and the audit and to see that the not-for-profit complies with applicable laws and regulations and a code of conduct. The following checklist will give you a broad reading on how your audit committee is doing — and any “no” answers will help to pinpoint areas for improvement.
There are many other components of a strong audit committee, including having effective processes in place to orient new committee members, investigate allegations and recommend the approval or modification of the annual audit to the board. Your CPA can review with your board best practices as well as state and national audit committee requirements.
For nonprofit executives and board members, accurate, relevant and timely financial information is key to making good decisions. But do all of your board members really understand the numbers they receive and what they mean to your organization? And do the numbers provide the right information — for example, when you’re trying to determine how and when to initiate a new program?
If your answers to these questions are “no” — or “I’m not sure” — you may want to reassess the usefulness of the financial information you provide.
Your board members probably come from different walks of life and different positions in the community. Some of them may have financial backgrounds, but many of them might not. And it’s this latter point you need to keep in mind as you supply financial data.
For example, don’t assume that everyone on your board of directors understands financial language. Provide them with some working definitions to help them along. Here are some commonly used financial terms and ways you can describe them in everyday language:
Liquidity — the nearness of an asset or liability to cash or cash conversion, or to a requirement to satisfy an obligation in cash.
Board-designated net assets — net assets set aside for a particular purpose or period by the board, such as safety reserves or a capital replacement fund, that have no external restriction by donors or by law.
Net assets released from restrictions — the transfer of funds from donor-restricted to unrestricted status based on satisfying donor-imposed stipulations with respect to the timing or purpose of the contribution (or, in rare cases, due to permission of a donor of permanently restricted funds).
Also consider providing your board with financial training. Bringing in outside speakers, such as accountants, investment advisors, and bankers, is a good start. Additionally, financially savvy individuals on your board — they may make up a separate finance committee — can be asked to share their financial expertise with the rest of the board.
One of the most common financial documents to circulate is the statement of financial position (the balance sheet). It shows an organization’s assets (cash, accounts receivable, and property and equipment), liabilities (accounts payable and long-term debt) and net assets (unrestricted, temporarily restricted and permanently restricted resources). Long lists of numbers can have a dizzying effect on readers.
But adding a pie chart can quickly show your board the composition of your nonprofit’s assets. See the chart “Breakdown of total assets.” At a glance, anyone can see that cash and cash equivalents are the largest part of this nonprofit’s total assets and a much smaller percentage is composed of investments and accounts receivable.
Or, you could create a two-slice pie chart that shows what portion of total assets can quickly be converted to cash (cash equivalents, investments and accounts receivable) vs. the portion that cannot (property and equipment).
A different example: You could create a pie chart to show how your annual event was funded last year: money from attendees, sponsors and general contributions. This tool can help a board make quicker and better-informed decisions — in this case, guiding them in setting or readjusting their funding expectations this year.
The statement of activities (the income statement) is another commonly circulated financial document. It generally starts with total support and revenue, including reclassifications from restricted to unrestricted. Then expenses, including program, management and general, and fundraising, are deducted to arrive at the overall change in net assets.
A bar chart is a good way to present this information: It can visually compare current revenues and expenses with those of previous periods. By updating the bar graphs on, say, a monthly basis, you can help nonfinancial board members easily compare revenues and expenses to the budget on a continuing basis.
Your annual budget assumes a particular level of support and revenue. If you don’t obtain certain grants — or if you sell less in program services than anticipated — your board will need to revisit anticipated expenses and make adjustments accordingly. An informational graphic is one way to quickly relay a heads-up.
Many entities have experienced cuts in funding and donations in the sluggish economy and, as a result, have reduced costs. If you supply board members with ratios for both the current year and prior year, they can see at a glance if these costs have been cut sufficiently.
Useful ratios include 1) management and general costs to total support and revenue, 2) program services to total support and revenue, 3) fundraising expenses to total support and revenue, and 4) fundraising expenses to donations (including deferred gifts). These ratios allow your board to see if the nonprofit’s costs and revenues are in line with its expectations, as expressed, for example, in the budget.
Let’s say that your management and general costs are $200,000 for the coming year and the total support and revenue for the organization is $2 million. You’d have a highly impressive ratio of 1:10 — 10% of every dollar earned is spent on administrative costs, with the remaining 90% available to fund programs and supporting activities.
Another useful ratio is the “current ratio.” This comparison of current assets to current liabilities is commonly used as a measure of short-term liquidity. For example, a ratio of 1:1 means an organization would have just enough cash to cover current liabilities if it ceased operations and converted current assets to cash.
With so many nonprofits finding themselves in a cash crunch, you should consider adding another report to your repertoire: a cash flow analysis. You can present your total cash for the period in a simple spreadsheet, as well as anticipated cash inflows and outflows for the coming month. This can help your board make important short-term decisions, such as applying for, or drawing down on, a line of credit.
Members of the community agree to become board members because they want to make a difference. And it’s up to you to supply them with information they fully understand so that the decisions they make are informed ones.
April 19, 2011
On April 14, President Obama signed the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011. The act repeals expansion of Form 1099 reporting under 2010’s Patient Protection and Affordable Care Act and Small Business Jobs Act. This short article explains why the expanded reporting requirements caused an uproar among potentially affected taxpayers, triggering widespread bipartisan support for repeal in Congress.
Businesses across the country, as well as certain property owners, can breathe a sigh of relief. Why? Congress has repealed provisions in last year’s Patient Protection and Affordable Care Act (PPACA) and the Small Business Jobs Act (SBJA) that expanded the mandatory filing of Form 1099. After months of setbacks, President Obama signed the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 into law on April 14.
Generally, individuals, businesses and other organizations must fulfill certain information reporting requirements. The purpose is to help taxpayers prepare their income tax returns and the IRS to assess the accuracy and completeness of filed returns.
Issuing a Form 1099 is one type of information reporting. The general requirement is that payments totaling $600 or more in a year to a single payee in the course of the payor’s trade or business must be reported on the form and submitted to the payee and the IRS. However, there are some major exceptions, including payments to most corporations, as well as payments for merchandise and similar items.
The PPACA included a provision that broadly expanded the mandatory filing of Form 1099, beginning for payments made after Dec. 31, 2011. The provision generally would have required businesses to report any payments to vendors that exceeded $600 in a calendar year.
The SBJA introduced another expansion of Form 1099 reporting that took effect for payments made after Dec. 31, 2010. This expansion would have affected taxpayers who receive rental income from a “passive” real estate investment, such as a vacation home. Previously, only taxpayers in the trade or business of rental properties were required to file Form 1099, but, under the new law, the IRS considered taxpayers who own one or more rental properties to be a “business” for Form 1099 purposes.
These expanded requirements likely would have created significant burdens for businesses and many property owners by dramatically increasing the number of necessary filings. In addition, affected businesses and property owners would have been responsible for obtaining taxpayer identification numbers from every payee that required a Form 1099. If a business was unable to obtain this information, it would have been required to withhold federal income taxes from payments to that payee and forward them to the government.
The repeal of the expanded Form 1099 reporting requirements means that businesses and property owners need not worry about drowning in paperwork or risking IRS penalties for failing to file a newly required Form 1099. If you need additional information on when you need to file Form 1099, we’re here to help.
If today's article about 1099 reporting has reminded you that you could use some assistance in the area of bookkeeping for your business, we can help! Stockman Kast Ryan + CO offers a wide variety of services, including assistance with many of your accounting functions, such as bookkeeping, payroll processing and reporting, sales tax returns, accounting systems and much more. For more information, click here.
April 5, 2011
We want our clients and friends to beware of a recent attempt to collect both money and information.
Small businesses across Colorado have received an official-looking letter (with a seal, citing the Colorado Revised Statues, and using attention-grabbing language) telling small business owners they're at risk of becoming "noncompliant" or "delinquent" and offering to file the business' Periodic Business Report with the Colorado Secretary of State for a fee of $225.
Though the majority of entities doing business in Colorado are required to file periodic reports with the Secretary of State’s office, the filing can be completed directly with the Secretary of State’s office, online, and in most cases the fee is merely $10.
Colorado Secretary of State Scott Gessler alerted Colorado businesses and non-profits to this letter issued by Nevada-based Corporate Controllers Unit, Inc. We want to pass on this important information to you.
For the full text of Secretary of State Gessler's Alert, Click here.
To protect your business' identity, the Secretary of State recommends that you subscribe to their email notification service.
The small business health care tax credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In 2010, the credit is generally available to small employers that contribute an amount equivalent to at least half the cost of single coverage towards buying health insurance for their employees. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.
To see if you qualify for this credit and to learn more, Click Here
Despite calls for simplifying the tax laws, they have actually been made much more complicated in the last few years. This filing season is no different. The 2010 Form 1040 reflects a number of new tax breaks. Some are straightforward. Others are complex. Some present choices. But they all provide an opportunity to save money. We want you to be aware of the new tax breaks for this filing season so that you can take full advantage of them.
Click here for a listing of the key changes for this filing season.
Colorado has increased its efforts to collect sales/use tax on online purchases. While Colorado residents have always been required to pay use tax on their internet purchases, there was no mechanism in place to force compliance. Now there is. However, a recent injunction has put enactment on hold indefinitely.
Click here to learn more.
The IRS launched the IRS2Go App for the iPhone and the Android. Taxpayers can check refunds and get tax information literally at their fingertips!
For more information, Click here.