Is your organization vulnerable for this scrutiny? Remember the key terms for establishing tax-exemption…organized and operated. Form 990 is the tool for reporting information annually to the IRS, substantiating the organization’s exempt purpose. Sources and uses…this will be interesting as the IRS moves forward in looking for additional revenue streams.

Is your organization vulnerable to this type of inquiry?  Call me. We can perform assessments to determine the organization’s risk.

For more information on this initiative, see this blog post by Land Trust Alliance.

Allowable and deductible can mean 2 different things?  First to the donee and then to the donor.

As long as the qualified charitable entity maintains control or “use of the funds” and uses these to further their exempt purpose, the contributions are allowable for the organization and deductible by the donor.

Donors may designate a program, ministry, event, project, endowment etc., of the qualified charitable entity as long as the church controls the funding. Be careful in not designating a specific individual as the recipient, this often disallows the deduction for the donor and the church is then required to report the funds as an “agency” transaction.

So the church can solicit contributions for general, administrative and fundraising functions? Yes, as long as the church retains control or “use of the funds” and the church is operating within its exempt purpose, as designated by its IRS code.

Questions? Give me a call or post a comment.

1. Exemption  of payroll taxes for qualified employees. For qualified employees hired between February 3, 2010 and January 1, 2011, the employer’s share of Social Security taxes (6.2%) on salaries/wages earned after March 18 will be “credited” as reported under the quarterly payroll tax filings. Beginning with the second quarter (March – June) filing, Form 941 has been revised to include the exemption. In order to be considered a “qualified employee” the individual must have been unemployed during 60 days prior to starting work or have worked fewer than 40 hours during the 60 day period; didn’t replace another employee unless separation was voluntary or for cause; and no relationship to employer.
2. $1,000 annual business tax credit for each new employee retained for a least one year. This credit is 6.2% of the employee’s wages during the 52 consecutive week period, up to $1,000.

So what are the reporting requirements?

Beginning with the 2nd quarter reporting period, complete the additional items on Form 941, beginning with line 5a. The exemption can be applied to a future reporting period, are an overpayment may be requested.

For each “qualified employee”, retain a completed copy of W-11, “Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit”.

How does a tax-exempt organization claim the business tax credit? The IRS has not finalized how T-E organization will report the tax credits, but speculation has been Form 990-T. Stay posted for future clarification.

What are the 2009 filing requirements? Most organizations (excluding churches) under Code Sec. 6033(a) must file one of the following applicable returns:

Form 990 - If gross receipts > $500,000 and total assets > $1,250,000

Form 990-EZ – If gross receipts < $500,000 and total assets < $1,250,000

Form 990-N – If gross receipts are “normally” $25,000 or less.

Form 990-PF – Exempt and taxable private foundations (no threshhold on revenue or assets).

Form 8868 – Application for extension to file the above returns.

These returns are due on the 15th day of the 5th month, following the organizations calendar/fiscal year-end.

For additional IRS information and frequently asked questions and answers, follow this link.

Are you in compliance? You have until midnight tonight, to file the required form.

What is program related and what is unrelated? Here’s an example – A substance abuse center offers educational and counseling services to individuals based on need and income levels, helping them understand the signs of addiction. Because the center’s exempt purpose is rehabilitating individuals with addictions, this revenue stream is directly related to the exempt purpose. However, suppose the center operates a donut shop selling baked goods to the public. Is the donut shop related to the center’s exempt purpose? Probably not.

In order to qualify as unrelated income, the activity must meet all of the following characteristics:
1. Performance of a trade or business (profit motive in the selling of goods or services).
2. Regular activity (based on frequency and continuity, compared to commercial enterprises).
3. Not related to exempt purpose (does not significantly advance the exempt purpose of the organization).

If the activity meets all three requirements, there may be exceptions that eliminate the potential tax. These exceptions include:
1. Activity produced/conducted by unpaid volunteers.
2. Activity is for the convenience of the organization’s members, employees, students, patients, etc. (Example – a hospital’s parking garage available only to employees, patients and hospital visitors).
3. Merchandise sold, substantially received from public donations (Example – clothing thrift store selling merchandise donated by the community).

Most passive income (interest, dividends, royalties, rent) is exempt, however if the revenue is generated from property that is debt financed, the transaction must be analyzed and determined if it is excluded. Additional criteria impact passive income, so it is important to understand the requirements.

The exclusions and the “except fors” make UBIT complicated.
But rest assured, the IRS is looking for these types of activities.

If an organization fails to file the required form for 3 consecutive years, the organization automatically loses their federal tax-exempt status. Revocation occurs on the filing due date of the 3rd year. Form 990s are due on the 15th day, following the fourth month after the organization’s calendar year-end. (Four 1/2 months after year end. If the organization’s year-end is December 31, then the return is due May 15th).

What does this mean to the organization?

1. Must reapply (Form 1023/1024) with the IRS to regain exempt status.

2. Must file income tax return.

3. Pay income tax.

4. Contributors cannot deduct donations to the organization.

How does an organization know if they are required to file a return with the IRS? Review the letter the IRS mailed to you, after they approved or denied Form 1023/1024. This letter, often referred as an IRS Determination Letter, documents whether the organization is exempt from federal income tax and what types of returns are required to be filed.

Questions about exempt status or which form to file? Contact me.

Non-profit organizations exempt status requires continued operational compliance with its exemption. Whether the organization fulfills a religious, educational, scientific, cultural service to the community, any organizational changes have to be focused on continuing or expanding the operational exemption. Many non-profit combinations involve an inherent contribution between the organizations.

When two non-profit organizations are combined – is it a merger or an acquisition? After the combination, who controls the combined entity? Who is in control? A new governance team – the combination is recorded as a merger. If one entity cedes control to another entity – the combination is recorded as an acquisition.

How is the combination recorded?

If two entities are merged – the carryover method records the merged assets/liabilities/net assets of the organization. The new entity’s initial reporting period begins with the merger date and the merger itself shall not be reported as activity in the new entity’s initial reporting period. The combined assets, liabilities, and net assets of the merging entities are included in the statement of financial position as of the beginning of that initial reporting period.

If a combination occurs because of an acquisition (control of the acquiree cedes to the acquiror) – the assets/liabilities of the acquiree are measured at fair value and any difference (calculated between consideration/assets received less liabilities assumed) is determined. This difference (if positive) is recorded by the acquiror, either as a contribution (if the acquiree is predominately supported by contributions and investment income) or as an asset called goodwill. If the liabilities assumed exceed the assets received/consideration given, then an expense is recorded in the statement of activities.

Combining organizations should be carefully considered by both boards/executive management. Determining “how” can be difficult and costly. Understand “who” will control and execute the mission, and then combine. SFAS 164 provides the accounting guidance for the transaction.

According to Steven Covey’s book The Speed of Trust: The One Thing That Changes Everything, trust means confidence. The following 13 behaviors either build or erode trust:

• straight talk
• demonstrating respect
• creating transparency
• righting wrongs
• showing loyalty
• delivering results
• getting better
• confronting reality
• clarifying expectations
• practicing accountability
• listening first
• keeping commitments
• extending trust first

For more information about Covey’s book and building trust, see ConvergenceCoaching LLC Inspired Ideas Building Trust. 

How does your organization perform in the trust department? Assess your team by using the 13 points of trust.

See full article here.

Need help with governance and regulatory compliance? Contact us.

During the budget process expenses are reviewed and operations are monitored/analyzed, determining the effectiveness to the mission. Remember, all T-E organizations must continue to be organized and operate in accordance with it’s stated exempt purpose, as approved by the IRS (Form 1023).

Before the end of the fiscal year, department managers are usually asked to submit their budget for next year. Reviewing the current year disbursements, estimated costs for significant capital/program projects, revisions for personnel and related costs are just several of the key factors that must be considered.

To help the finance department and ultimately those charged with governance, churches may ask their congregants to complete a pledge card, indicating their intention to give. During this weekend, First United Methodist Church of Mansfield, accepted the annual “estimates of giving”. An estimate or an “intention to give” allows the church to collect and assess the level of contributions for the next year, without recording an unconditional promise to give. Remember conditional promises to give are recorded when collected (or when the condition has been met). Unconditional promises to give as recorded with the promise has been made by the donor.

So as your church prepares it’s annual budget, it’s o.k. to ask congregants for a giving estimate. This estimate allows management to prioritize capital expenditures and program services.