April 15 always seems to sneak up, and surely this year will be no different. While there is no escaping the tax deadline, use the following tips to streamline the tax return process and minimize stress.
The four tips outlined above are suggestions we’ve made for years. They help streamline the process for you and your tax professional. With your help, we can focus on maximizing valuable tax deductions. The fifth tip is new this year, and it makes the first four tips a breeze.
TaxCaddy makes it easier than ever to gather your 1040 tax documents and deliver them to us, communicate with us, answer your questionnaire electronically, and sign documents like the e-file authorization. We are excited about this powerful, free solution and we think you will be, too.
Soon you’ll receive an email inviting you to create your TaxCaddy account. Once you receive the invitation there are three easy steps to get started. In the meantime, click here like to learn more about TaxCaddy.
In a Notice 2020-66 the IRS has extended more tax deadlines to cover individuals, estates, corporations and others. This extension includes a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020, including estimated tax payments due June 15 and the deadline to claim refunds from 2016.
This notice is particularly relevant to nonprofit organizations.
The Notice also suspends associated interest, additions to tax, and penalties for late filing or late payment until July 15, 2020.
Charitable giving may help some filers reduce tax liability, particularly for high-income earners or those who have itemize deductions in excess of the new standard deduction. This 18 minute webinar shares a brief overview of tax reform and illustrates three approaches to planning for charitable giving.
As the new tax bill worked its way through Congress last fall, nonprofits across the country raised their voices high to share concerns about its disincentives for charitable donations — as well as the proposed repeal of the Johnson Amendment. Little was heard, though, about changes to the rules for unrelated business income tax (UBIT). It turns out that the final law, the Tax Cuts and Jobs Act (TCJA), includes several provisions that have the potential to boost your organization’s liability for the tax, regardless of whether you operate an unrelated business.
Why your UBI may grow
The most important change relates to how unrelated business income (UBI) is computed. The new law requires nonprofits to calculate UBI separately for each unrelated business, with the $1,000 deduction typically allowed applied to the aggregate UBI for all businesses.
Your UBI also can increase because net operating losses (NOLs) can only be claimed against future income from the specific business that generated the loss. Under previous law, you could use NOLs from one business to offset the income of another or to offset gains from alternative investments or pass-through entities, also considered UBI.
UBI also might grow due to a change in how certain fringe benefits are treated under the TCJA. In previous years, you could provide your employees qualified transportation benefits (including commuter transportation and transit passes), qualified parking fringe benefits and on-site athletic facilities free of income tax for both you and employees.
The TCJA, however, treats the payments for such benefits as UBI unless they are directly connected to an unrelated business (for example, parking benefits provided employees of an unrelated business). Congress made the change to create parity between nonprofits and taxable organizations. For-profit businesses lost a previous tax exemption for certain fringe benefits under the TCJA. The end result, though, is that nonprofits may owe UBIT even without operating any unrelated businesses.
It’s not all bad news. The new law also changes the corporate tax rate that nonprofits pay on UBI to 21% from a range of 15% to 35%. In some cases, a nonprofit’s UBIT liability might fall despite your higher UBI.
What you can do
Fortunately, you have some options to avoid the worst effects of these changes. For example, you may conduct an audit of your unrelated businesses. You might find that you have been over-reporting your UBI because you have not captured all the related business expenses.
Another option for nonprofits with multiple unrelated businesses is forming a single taxable corporate subsidiary to hold all of them, which would permit you to again offset their income and losses. Any restructuring will likely carry some implications, whether tax-related, financial or operational.
Changes to the UBIT rules have not received as much coverage as some of the other TCJA provisions, but they may impact your organization. Consult with your CPA to determine steps you can take to minimize the impact of tax reform on your bottom line.
In a like-kind exchange, a taxpayer doesn’t recognize gain or loss on an exchange of like-kind properties if both the relinquished property and the replacement property are held for productive use in a trade or business or for investment purposes. For exchanges completed after Dec. 31, 2017, the TCJA limits tax-free exchanges to exchanges of real property that is not held primarily for sale (real property limitation). Thus, exchanges of personal property and intangible property can’t qualify as tax-free like-kind exchanges.
Although the real property limitation applies to exchanges completed after Dec. 31, 2017, transition rules provide relief for certain exchanges. Specifically, the real property limitation doesn’t apply to an exchange if the relinquished property is disposed before Jan. 1, 2018, or the replacement property is received by the taxpayer before Jan. 1, 2018. If the transition rules apply and all other requirements for a tax-free exchange are satisfied, an exchange of personal property or intangible property that is completed after Dec. 31, 2017 can qualify as a tax-free like-kind exchange.
When President Trump signed the massive federal income tax overhaul into law on December 22, 2017, much was made of nonprofits’ understandable concern that the higher standard deduction would reduce incentives for charitable giving. The concern is, of course, extremely important, but the new law also includes several other provisions that may affect nonprofits.
The Tax Cuts and Jobs Act (TCJA) has substantially lowered the corporate tax rate to 21%, a significant benefit to any nonprofits already paying unrelated business income tax, which is imposed at the corporate rate. But when it comes to calculating the income that is subject to this tax, the new law brings a significant change for nonprofits.
The TCJA requires nonprofits to compute unrelated business taxable income (UBTI) separately for each unrelated business activity and pay tax on any activity with net income. That means nonprofits cannot use a loss from one unrelated business to offset income from a different unrelated business for the same tax year.
They may, however, use one year’s losses on an unrelated business to offset profits in a different year for that business, subject to certain restrictions. For example, if your nonprofit incurred a loss in its bookstore business in 2018, it can use that loss to offset bookstore profits in 2019.
The TCJA also makes certain fringe benefits includable in UBTI. These include qualified transportation benefits (for example, transit passes), qualified parking benefits and access to any on-site athletic facility.
The TCJA also imposes a 21% excise tax on “excessive” executive compensation. The tax applies to the sum of any compensation (including most benefits) in excess of $1 million paid in the tax year to a covered employee plus certain large payments to that employee upon his or her departure from the organization (known as “excess parachute payments”).
A “covered employee” means a current or former employee reported as one of the five highest paid employees for any taxable year beginning after 2016. Licensed medical professionals are not covered employees for this tax.
But what is an “excess parachute payment?” A payment generally is considered an excess parachute payment if two conditions are met:
The excess parachute payment subject to the excise tax is the amount of the parachute payment less the base amount.
The increase in the standard deduction — it is expected to reduce the number of taxpayers who itemize and, thus, can deduct charitable contributions — is not the only change that may affect giving.
For example, the TCJA doubles the estate tax exemption to $10 million (indexed for inflation) through 2025. With fewer wealthy individuals at risk of paying this tax, fewer people may make the generous donations that have been partly motivated by a desire to shrink their taxable estates. Plus, the TCJA eliminates any deduction for donations made in exchange for the right to buy season tickets to college athletic events.
The TCJA does raise the limit on cash donation deductions from 50% of adjusted gross income to 60%. But cash donations at this level are uncommon, so the higher limit may not stimulate much additional giving.
Some nonprofits issue tax-exempt bonds to finance construction and other capital activities. These bonds typically pay lower interest rates than other bonds. But investors are willing to accept the lower rates because they are not required to pay income taxes on the interest.
The TCJA, however, repeals the tax-exempt treatment for interest paid on a bond issued to refinance another tax-exempt bond. An “advance refunding bond” is used to pay principal, interest or redemption price on a prior bond issued more than 90 days before redemption of the refinanced (refunded) bond.
Let’s say you issue tax-exempt bonds at 4% interest but later discover you can refinance the bonds at 3% interest. Under the TCJA, the interest payments on the 3% advance refunding bonds will not be tax-exempt for investors — that means you will need to pay a higher interest rate because of the new bonds not being tax-exempt as recompense for the investors’ increased tax liability.
Despite the advantage of a lower tax rate on unrelated business income, the new income tax law may reduce overall charitable giving while simultaneously increasing some nonprofits’ costs. Your CPA may help identify the potential impact of charitable giving on your nonprofit as well as chart the best course forward.
With the end of the year on the horizon, your supporters may be thinking about making charitable contributions they can deduct on their 2017 federal tax returns. If a nonprofit wants to keep donors on its side, it needs to explain that different types of donations can carry different tax benefits and that some donations are not deductible at all.
What can be deducted?
Generally, donors can deduct contributions of money or property. The amount of the allowable deduction varies based on the type of donation:
Cash. Cash donations are 100% deductible, including donations made by check, credit card or payroll deduction.
Ordinary income property. Donations of this type are generally limited to the donor’s tax basis in the property (usually the amount the donor paid for it). Specifically, donors can deduct the property’s fair market value less the amount that would be ordinary income or short-term capital gains if they sold the property at fair market value (FMV).
Property is ordinary income property when the donor recognizes ordinary income or short-term capital gains if he or she sold it at FMV on the date of donation. Examples include inventory, donor-created works of art, and capital assets (for example, stocks and bonds) held for one year or less.
Capital gains property. Donors of capital gains property can usually deduct the property’s fair market value. Property is considered capital gains property if the donor would have recognized long-term capital gains had he or she sold it at FMV on the donation date. This includes capital assets held more than one year. But there are certain situations where only the donor’s tax basis of the property may be deducted, such as when the donation is intellectual property (for instance, a patent or copyright) or, interestingly, “certain taxidermy property.”
Tangible personal property. As the name implies, tangible personal property can be seen or touched. Examples include furniture, books, jewelry and paintings. If your nonprofit uses the donated property for its tax-exempt purpose — for example, a museum displays a donated painting — the donor can deduct its fair market value. But if the property is put to an unrelated use — for example, a nonprofit children’s hospital sells the donated painting at its charitable auction — the deduction is limited to the donor’s basis in the property.
Vehicles. Generally, if a vehicle has an FMV greater than $500, the donor can deduct the lesser of the gross proceeds from its sale by the organization or the FMV on the donation date. But if the nonprofit uses the vehicle to carry out its tax-exempt purpose — for instance, an animal welfare organization that uses a donated van to transport rescued dogs and cats — the donor can deduct the FMV. Make sure you provide Form 1098-C, which your donor must attach to his or her tax return to take the deduction.
Use of property. Say a supporter donates a one-week stay at his vacation home for an auction. Unfortunately, he cannot take a deduction because generally only donations of the full ownership interest in property are deductible. The right to use property is considered a contribution of less than the donor’s entire interest in the property. But there are some situations in which a donor can receive a deduction for a partial-interest donation, such as with a qualified conservation easement.
Donors also might want to claim a deduction for the donation of their services, such as when a hair stylist donates one free haircut and color for your auction, or a graphic designer lays out each issue of your quarterly newsletter for free. These types of donations are not deductible as contributions, only as normal costs of doing business. But the related out-of-pocket costs, such as supplies and miles driven for charitable purposes (14 cents per mile), are deductible as charitable contributions.
Help donors help you out
Be aware that there are additional limits on charitable deductions. Proposed tax law changes could also affect charitable deductions, though most likely not for 2017. So keep an eye on federal developments in Washington.
While tax education may seem beyond your responsibility, you cannot afford disgruntled donors. Taking the time to make sure your donors understand the tax implications of their gifts can avoid unpleasant surprises down the road, and keep donors on board as long-term supporters.
What other limits apply to charitable deductions?
As you probably know, there’s a limit to the amount of charitable deductions a taxpayer can claim in a given year. The taxpayer’s total deduction generally cannot exceed 50% of his or her adjusted gross income (AGI). (A higher limit applies for certain qualified conservation contributions.) But donations of capital gains property are generally limited to 30% of AGI.
In some cases, the limits are even lower. For example, deductions for contributions to certain private foundations, veterans’ organizations, fraternal societies and cemetery organizations are limited to 30% of AGI. And capital gains property contributions to such organizations are limited to 20% of AGI.
Nonprofits have pursued corporate sponsorships for years, with good reason. Effectively executed, sponsorships can benefit both sponsor and organization. But if your nonprofit is not careful, a sponsorship can be deemed paid advertising and your organization could end up liable for unrelated business income tax (UBIT). Although the Internal Revenue Code includes an exception from UBIT for certain sponsorship arrangements, navigating the rules can prove tricky.
Generally, “qualified sponsorship payments” received by a nonprofit aren’t income from an unrelated trade or business. A qualified sponsorship payment is a payment of money, transfer of property, or performance of services with no expectation that the sponsor will receive any “substantial return benefit.” Benefits returned to the sponsor can include advertising; goods, facilities, services or other privileges; rights to use an intangible asset such as a trademark, logo or designation; or an exclusive provider arrangement.
To be considered “substantial” by the IRS, the aggregate fair market value (FMV) of all benefits provided to the sponsor during the year must exceed 2% of the amount of the sponsor’s payment to the nonprofit. If the total benefit exceeds 2% of the payment, the entire FMV of the benefits (not just the excess amount) is a substantial return benefit.
The regulations specify for purposes of the exception that a nonprofit’s “use or acknowledgment” (as opposed to promotion, marketing or endorsement) of a sponsor’s name, logo or product lines won’t constitute a substantial return benefit to the sponsor. Your organization’s use or acknowledgment can include:
You can include a sponsor’s product at the sponsored activity as long as there’s no agreement to provide the sponsor’s product exclusively. Mere display or distribution of a sponsor’s product at an event, whether for free or remuneration, isn’t considered an inducement to purchase, sell or use the product (that is, advertising). It won’t affect the determination of whether the qualified sponsorship payment applies.
Say that a nonprofit is holding an annual 10K race and is providing participants with drinks and prizes supplied free of charge by a sponsor. If the organization lists the sponsor’s name in promotional materials or includes it in the event name, those activities constitute permissible acknowledgment of the sponsorship. Therefore, the drinks and prizes are an exempt qualified sponsorship payment.
Note that contingent payments aren’t qualified sponsorship payments. If a sponsor’s payment is contingent on event attendance, broadcast ratings or other measures of public exposure to the sponsored activity, the payment falls outside the exception.
When a sponsorship comes with a substantial return benefit, only the part of the sponsor’s payment that exceeds the substantial return benefit is considered a qualified sponsorship payment. The remainder is unrelated business income.
Consider, for instance, a not-for-profit that receives a large payment from a sponsor to help fund an event. The organization recognizes the support by using the sponsor’s name and logo in promotional materials. It also hosts a dinner for the sponsor’s executives, and the FMV of the dinner exceeds 2% of the sponsor’s payment.
The use of the sponsor’s name and logo constitutes permissible acknowledgment of the sponsorship, but the dinner is a substantial return benefit. As a result, only that portion of the sponsorship payment that exceeds the dinner’s FMV is an exempt qualified sponsorship payment.
Application of the qualified sponsorship payment exception and the rules for unrelated business income are complicated. Your financial advisor can help reduce the risk of incurring UBIT.
The Internal Revenue Code provisions about unrelated business income distinguish between “exclusive sponsor” and “exclusive provider” arrangements. An arrangement that acknowledges a corporation as the exclusive sponsor of a nonprofit’s activity generally doesn’t by itself result in a substantial return benefit that could incur the unrelated business income tax (UBIT) for a nonprofit. Similarly, an arrangement that acknowledges a company as the exclusive sponsor representing a particular trade, business or industry won’t constitute a substantial return benefit on its own.
On the other hand, an arrangement with a sponsor that limits the sale, distribution, availability or use of competing products, services or facilities in connection with the nonprofit’s activity generally does result in a substantial return benefit. For example, if the organization agrees in exchange for a payment to allow only the sponsor’s products to be sold in connection with an activity, the sponsor has received a substantial return benefit.
Colorado Secretary of State Wayne Williams recently urged Coloradans to be mindful when making a donation to Hurricane Harvey relief efforts.
“It is important for Coloradans to research the charities they support and trust that their donations are being used prudently,” he said.
Williams shared 10 tips to avoid charity scams.
If you have tax questions about donating to the hurricane relief efforts, please call your tax professional.
If you run a business “on the side” and derive most of your income from another source (whether from another business you own, employment or investments), you may face a peculiar risk: Under certain circumstances, this on-the-side business might not be a business at all in the eyes of the IRS. It may be a hobby.
The hobby loss rules
Generally, a taxpayer can deduct losses from profit-motivated activities, either from other income in the same tax year or by carrying the loss back to a previous tax year or forward to a future tax year. But, to ensure these pursuits are really businesses — and not mere hobbies intended primarily to offset other income — the IRS enforces what are commonly referred to as the “hobby loss” rules.
If you have not earned a profit from your business in three out of five consecutive years, including the current year, you will bear the burden of proof to show that the enterprise is not merely a hobby. If the profit test can be met, the burden then falls on the IRS. In either case, the agency looks at factors such as the following to determine whether the activity is a business or a hobby:
Dangers of reclassification
If your enterprise is reclassified as a hobby, the loss from the activity may not be used to offset other income. You may write off certain expenses related to the hobby, but only to the extent of income the hobby generates.
Contact your business advisor for questions on treatment or reporting of any activities potentially subject to hobby loss rules.