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.
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If your nonprofit needs to finance a project or program, you may be discouraged by reports that credit is still tight. But if you understand the choices available to you, your chances of securing financing will grow.
Bank financing generally comes in two basic forms: line of credit or term loan. Your nonprofit’s underlying cash needs will determine which one you should pursue.
A line of credit is a negotiated amount of financing you can draw against as needed. When the goal is to smooth out cash flows over the year, it’s usually the best option. The maximum amount is available to you, but you use only what you need.
If you obtain a $200,000 credit line, for example, you may use up to the $200,000 limit. Once the line has been paid down to $180,000, you again have $20,000 available to borrow. You can continue this draw-down and repayment cycle until the credit line’s term expires. (But check with your lending officer, because some banks are terminating unused lines of credit.)
Required monthly payments may be limited to interest expense, while principal payments can be made any time cash flow permits. So you have flexibility in how much you repay each month.
When you obtain a term loan, you receive a lump sum, usually for a specific purchase. The term loan application process is usually more complicated, and approval typically takes more time. Repayment is in installments, which means you’ll make equal monthly payments consisting of interest and principal throughout the entire loan term.
An alternative to a traditional bank line of credit or loan is a tax-exempt bond issued by a municipal, county or state government. The interest payments to investors aren’t subject to federal income tax and may be exempt from state and local income tax.
Tax-exempt bond financing may benefit your nonprofit because tax-exempt interest rates are generally two to three percentage points lower than on money raised from other sources. The Internal Revenue Code allows a nonprofit to use the proceeds, which are borrowed from the issuer, to further the organization’s stated charitable purpose.
The first step in planning a bond issue is to identify which local government unit has the ability to issue bonds on a nonprofit’s behalf. This unit (the issuer) then lends the bond proceeds to you.
The next step is selecting a team of specialists to work out the mechanics of the bond issue, including a bond counsel who’ll draft the documents and deliver an opinion. An underwriter advises on the bond issue’s structure and then buys the bonds from the issuer and offers them to investors.
Tax-exempt bonds make the most sense for larger capital investments. Although interest payments over the bond’s term can be significantly lower than on a term loan, the up-front legal and other fees can be substantial.
Also consider that the process may take longer due to more stringent financial disclosure requirements and tighter scrutiny overall. While a line of credit or term loan can be approved in a matter of weeks, bond financing can take six months to a year before the funds are received.
In any economy — whether credit is tight or plentiful — a smart nonprofit will research and weigh its options carefully before seeking financing. Your CPA can assist you in preparing the financial documentation, such as a multiyear cash flow projection and a project budget, which you likely will need to secure financing.
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.
SKR Nonprofit Newsletter
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Meet our Nonprofit Specialists!
Steve Hochstetter, CPA, CVA, Audit Partner
Jeff Talus, CPA, Tax Partner Stockman Kast Ryan + CO nonprofit services include:
For more information on any of our nonprofit services, please contact us at (719) 630-1186. We welcome your feedback! Please use this Secure Email link to tell us what you found helpful and what topics you would like to see in the future.
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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.
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.
About two-thirds (67%) of the not-for-profit executive directors who participated in the Daring to Lead 2011 study, sponsored by the Meyer Foundation and CompassPoint Nonprofit Services, said they plan to leave their current jobs within five years. The percentage was somewhat lower than in the prerecession 2006 study, in which 75% of participating executive directors said they’d leave their position within that five-year period.
