Posted by: Lou Volpe, CPA | February 18, 2015

Substantiation Rules Are Not Meant to be Broken

Posted by Lou Volpe, CPA

Substantiation RulesThe holiday season has passed and it is now tax-filing season. During this time, charitable organizations need to make sure that they are doing everything in their power to assist their donors in following the IRS donation “substantiation rules.” Winter is already a cold and dark time of the year, so if charitable organizations doe not assist donors in following these substantiation rules, they could be leaving them out in the pitch black with frostbite. By following these substantiation rules, charitable organizations will not only provide the proof that their donors need to deduct financial gifts, but having proper documentation will also help their donors avoid any further problems with the IRS.

There are various substantiation rules and recordkeeping requirements that need to be met from both the donor and the charitable organization in order for a donor’s charitable contribution to be eligible for deduction on his income tax return.  A donor cannot claim a deduction for any monetary gift or for any unreimbursed out-of-pocket expenses related to giving services to a qualified organization unless the donor maintains adequate records of the contribution/out-of-pocket expenses in the form of either a bank record (i.e., cancelled check or credit card receipt) or a contemporaneous dated written acknowledgement from the charitable organization (i.e. receipt or letter).  For the dated written acknowledgement to be considered contemporaneous with the contribution, a donor must receive it from the charitable organization by the earlier of:  the date on which the donor actually files their income tax return for the year of the contribution; or the due date (including extensions) of the return.  One thing is for certain.  If these rules and requirements are not met, no deduction will be allowed.

When a donor makes a charitable contribution under $250, a cancelled check or credit card receipt is usually sufficient substantiation. When a donor makes cash or noncash contributions of $250 or more, the donor is required to obtain a contemporaneous dated written acknowledgement of the contribution from the recipient charitable organization.  Although the responsibility to obtain this dated written acknowledgment falls at the feet of the donor, the charitable organization can assist a donor by providing a timely written statement containing the following information:  1) name of the charitable organization, 2) amount of the cash contribution and description (but not the value) of a noncash contribution (separately itemized if one receipt is used to acknowledge two or more contributions), 3) date of the contribution, and 4) either a statement that no goods or services were provided by the organization in return for the contribution, or a description and good faith estimate of the value of goods or services that the organization provided in return for the contribution. If a religious organization provides only intangible religious benefits to a donor, the dated written acknowledgement does not need to describe or value those benefits.  It only needs to state that the religious organization provided the benefits.

If a donor receives goods or services in exchange for a single donation in excess of $75, the charitable organization must provide a contemporaneous dated written disclosure statement to the donor.  The required dated written disclosure statement must inform the donor that the amount of their contribution that is deductible for federal tax purposes is limited to the excess of money contributed over the value of goods and services provided by the organization.  The dated written disclosure must also provide the donor with a description and good faith estimate of the fair market value of the goods or services.

In addition, insubstantial goods or services a charitable organization provides in exchange for contributions do not have to be described in the dated written acknowledgement.  Goods and services are considered to be insubstantial if the payment occurs in the context of a fundraising campaign in which a charitable organization informs the donor of the amount of the contribution that is deductible and: the fair market value of the benefits received does not exceed the lesser of 2 percent of the payment of $104 (for 2014), or the payment is at least $52 (for 2014); the only items provided bear the charitable organization’s name or logo (i.e., calendars, mugs, or posters); and the cost of these items is within the limit for “low-cost articles,” which is $10.40 (for 2014).

When a donor makes a noncash contribution the donor is required to attach a completed Form 8283 to their tax return. Section A of Form 8283 should be completed by the donor to report donations of property in which the donor is claiming a deduction of $5,000 or less per item or group of similar items. Section A should also be completed by the donor to report donations of publicly traded securities. Section B of Form 8283 should be completed by the donor to report donations of property in which the donor is claiming a deduction of more than $5,000 per item or group of similar items. A written appraisal from a qualified appraiser is normally necessary before completing Section B of Form 8283; however, exceptions do apply. Those exceptions can be found in the IRS’s Instructions for Form 8283 along with other important information concerning appraisal requirements and when the appraisal must be attached to the return.

In determining whether the deduction for a group of similar items is more than $5,000, the donor should consider all items in the group, even if items in the group were donated to more than one charitable organization. However, a donor must file a separate Form 8283, Section B, for each charitable organization. Similar items of property are items of the same generic category or type, such as coin collections, paintings, books, clothing, jewelry, nonpublicly traded stock, land, or buildings.

Charitable organizations can assist their donors in meeting these substantiation rules by implementing certain best practices. These practices include providing dated written acknowledgement letters to all donors who contribute to the organization regardless of the amount contributed and verifying that the donor has obtained an appraisal, if necessary, before accepting a significant noncash contribution.

By working together to follow these substantiation rules, both donors and charitable organizations will be able to enjoy the many benefits that can be obtained.  Donors will be able to claim a charitable contribution on their income tax returns without having to worry about any future issues with the IRS during this already stressful time of the year.  And charitable organizations will be able to maintain a strong foundation with their donors and may even attract new donors to their cause due to their diligence in making sure that their donors’ charitable contributions are acknowledged and properly documented.

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Posted by: Christina Bell, CPA | January 20, 2015

Small Nonprofit? Get the Credit You Deserve!

Posted by Christina Bell, CPA

Nonprofit Healthcare - Belfint Lyons Shuman - Delaware CPA FirmIn March 2010, the Affordable Care Act was enacted to encourage small businesses and tax-exempt organizations to offer health insurance to their employees for the first time or continue the health care coverage they already provided.

The Act gave eligible nonprofits the opportunity to receive a Small Employer Health Care Tax Credit for premiums paid to provide health insurance to their employees. For tax years 2010 through 2013, the maximum allowable credit for nonprofits was 25% of premiums paid. For tax year 2014, the maximum allowable credit increased to 35% of premiums paid. The good news for eligible nonprofits is that the credit is refundable, meaning that even if the organization has no taxable income, they still may be eligible to receive the credit as a refund.

Eligibility is limited to those nonprofits that meet the following criteria:

  • Pay at least 50% of employee-only health care insurance costs for their employees.
  • Employ fewer than 25 full-time equivalent (FTE) employees. Generally, all employees who perform services are considered employees; however, special rules apply to leased employees, seasonal employees who work fewer than 120 days, and ministers.
  • Average employee wages are less than $50,000. Wages, for this purpose, are defined as wages subject to Social Security and Medicare tax withholding without considering any wage base limit.
  • Purchased health care insurance through the SHOP Marketplace, unless an exception was granted (applicable for tax years after 2013).

Eligible nonprofits can claim a credit for the years 2010 through 2013 and for any two years after that. The amount of the credit is determined by completing IRS Form 8941. Once the amount is calculated it is claimed on line 44f of IRS Form 990-T, even if the organization has no unrelated trade or business income.

The credit phases out gradually for organizations with average wages between $25,000 and $50,000, and for organizations with the equivalent of between 10 and 25 full-time employees.

A common question is “What if my nonprofit is eligible for the credit but failed to claim it in prior years?” To change a previously filed return, write “Amended Return” at the top of the Form 990-T. Also, include a statement that indicates the line numbers on the original return that were changed and provide the reason for each change. In this case, Form 8941 should also be included. Generally, the amended return must be filed within 3 years after the date the original return was due or 3 years after the date the organization filed it, whichever is later.

For more information about the Small Business Health Care Tax Credit, including detailed guidance, instructions for Form 8941, and answers to frequently asked questions, visit the IRS website.

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Posted by: Casey Hagy, CPA | November 3, 2014

Back to School with Charity Navigator

Posted by Casey Hagy, CPA

Charity NavigatorSchool is in full swing across the country, and it looks like students won’t be the only ones who will be graded out of 100 points this year. Charity Navigator, a nonprofit organization that evaluates charities in the United States and compares them to charities with similar causes, recently changed their rating system from a 70-point scale to a 100-point scale. The mission of Charity Navigator is to guide intelligent giving. By guiding intelligent giving, they hope to advance a more efficient and responsive philanthropic marketplace. Their current rating system has two dimensions:

  1. Financial Health
  2. Accountability & Transparency

Charity Navigator analyzes 24 different metrics associated with these two dimensions and assigns an overall score and overall rating. Click here to learn more about the 24 metrics analyzed during the rating process. Because our educational system is based on the 100-point system, the organization thought the change from a 70-point scoring system to a 100-point scoring system would make their rating process simpler and easier to understand. The 70-point system was used from the founding of the organization in 2002 when there was only one dimension (Financial Health) and seven metrics used to judge nonprofits. In 2011, Charity Navigator expanded their rating analysis to include the second dimension (Accountability & Transparency) which added 17 metrics. They are currently working on adding a third dimension, Results Reporting, which will evaluate the outcomes of an organization’s work and whether these outcomes are providing a social value. Charity Navigator feels the third dimension will be the most important dimension in the rating process as charities exist to promote positive change in communities and people’s lives. They hope to have the new dimension implemented by the end of 2016.

Below is the formula Charity Navigator uses to calculate an organization’s overall score, as well as a description for each rating.

Charity Navigator Formula

 

 

Casey blog

 

 

 

 

 

 

 

 

 

So, if you notice that your score is higher than 70 points, you haven’t received extra credit, but you are that much closer to the coveted four-star rating!

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Posted by: Jonathan D. Moll, CPA | September 30, 2014

Identity Crisis – When There is a Need to Change Your Nonprofit’s Name

Posted by Jonathan Moll, CPA

Nonprofit Name ChangeThe need for a nonprofit organization to change its name happens quite frequently.  The reasons vary: mergers with other organizations, additions of or changes to major programs, to distinguish from prior affiliated organizations or groups, or to improve marketability and fundraising. At times, organizations may delay this decision due to being unfamiliar with the required process. Fortunately for those looking to make the change, the process is simple and usually requires 3 steps:

Step 1 – legally change your organization’s name

This step usually begins with a board resolution to change the name. The organization must then amend its organizational documents (articles of incorporation and bylaws) and file the amended documents with the state of incorporation.

Step 2 – notify the IRS

This is normally as simple as notifying the IRS of the change when filing its next annual return (Form 990 or Form 990-EZ).

However, if an organization does not have an annual return filing requirement, qualifies to file for 990-N (e-Postcard), or is required to e-file its return, the name change should be reported by letter or fax to the IRS’ Customer Account Services. Generally, a copy of the amended articles of incorporation and proof of filing are required. The letter or fax must include:

  • Full name (both prior and new)
  • Employer Identification Number
  • Authorized signature of officer or trustee

Step 3 – notify your vendors, customers and donors

This step is often overlooked as the assumption is it will occur naturally through continued operations. However, as funding contracts or vendor contracts are renewed, the simplest process is often the most successful process. Being proactive to eliminate potential inconsistencies is usually a wise investment of time.

Despite the process being relatively straightforward and simple, I always encourage consulting your CPA when the IRS is involved.

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Posted by: Casey Hagy, CPA | September 16, 2014

What to Consider When Changing Your Mission Statement

Posted by Casey Foulk, CPA

446538765_bfa89f9875_nA wise person once said, “The only thing that is constant in life is change.” This principle lends itself well to the world of nonprofit organizations. A variety of factors cause nonprofit organizations to change. From regulatory changes to changes in demand for services to changes in leadership and administration, adaptation is a skill necessary for survival. At times, the evolution of an organization requires a nonprofit to change its mission. A mission statement describes a nonprofit’s purpose, what they intend to do, and whom they intend to serve. Most importantly, a nonprofit’s approved exempt activities must be embodied in its mission.

Below are two common reasons nonprofits may need to change their mission statement, as well as factors that need to be considered in doing so.

1. To better articulate the goal of the existing programs. The programs of the organization have not changed, but the mission statement could be rewritten to better reflect your current operations.

a. Upon approval of the new mission statement by the organization’s board, the bylaws and articles of incorporation should be evaluated to determine if they need to be updated. In addition to the possibility of amending corporate documents, the organization should update its website, marketing materials, etc.

b. Changes to the mission statement must be reported to the IRS on the organization’s Form 990 annual information return. Update Part 1 Line 1 and Part III Line 1 which ask for a description of the organization’s mission. If corporate documents including bylaws were updated, the organization should also mark “yes” to Part VI Line 4 which asks if any significant changes to governing documents have been made since the prior Form 990 was filed (an explanation should be reported on Schedule O).

2. Changes to a program or development of a new program. In addition to the steps listed above, if the mission statement needs to be updated because the operations of the organization are changing in some way, they have two options to communicate the changes to the IRS.

a. Tell the IRS. If the organization is confident that the changes to their programs or addition of a new program is in line with their approved tax-exempt purpose as specified in Section 501(c)(3) of the Internal Revenue Code, they can inform the IRS by answering “yes” to Part III Line 2 of the Form 990, which asks if the organization undertook any significant program services during the year which were not listed on the prior Form 990 (an explanation should be reported on Schedule O).

b. Ask for approval. If the changes to an organization’s program or addition of a new program are not within the scope of their original tax-exempt purpose as described on the original Form 1023 application, they should ask for approval from the IRS by requesting a private letter ruling in accordance with Revenue Procedure 2014-4. A sample format for a letter ruling request can be found here. The IRS charges an applicable user fee for the processing of a private letter ruling in accordance with Revenue Procedure 2014-8.

As always, it is best to consult your CPA for guidance on tax compliance matters.

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Posted by: Christina Bell, CPA | September 4, 2014

Rental Income – Taxable to my Nonprofit or Not?

Posted by Christina Bell, CPA

Rental Income - nonprofitsThe IRS defines unrelated business income (UBI) as income from a trade or business regularly carried on by a nonprofit organization that is not substantially related to the performance by the organization of its exempt function. One source of UBI is rental income; however, not all rental income is subject to unrelated business income tax (UBIT). So how is a nonprofit to know if the rental income they receive is subject to UBIT? A few general rules are listed below. In addition, IRS publication 598 details all rules and regulations governing UBI, including income from rental property.

  1. Rental income from real property is excluded from UBI if there is no acquisition indebtedness on the property.  Acquisition debt is defined as the unpaid debt incurred by an organization (1) when acquiring or improving property, (2) before acquiring or improving property if the debt would not have been incurred except for the acquisition or improvement, or (3) after acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement. Acquisition debt also includes liens similar to a mortgage. A lien is similar to a mortgage if titled to property encumbered by a lien for the creditor’s behalf such as a security interest under the Uniform Commercial Code.
  2. Rental income from real property that is subject to acquisition indebtedness is excluded from UBI if 85% or more of the use of the property is substantially related to the organization’s exempt purpose. The percent of usage can be determined by dividing the time the property is used for exempt purposes by the total time the property is used (hours) or by dividing the part of the property that is used for exempt purposes by the part used for all purposes (square footage).
  3. Rental income from real property that is subject to acquisition indebtedness is excluded from UBI if the lessee is a related organization. For this purpose an exempt organization is related to another exempt organization only if:
    • One organization is an exempt holding company and the other receives profits derived by the exempt holding company.
    • One organization controls the other
    • More than 50% of the members of one organization are members of the other
    • Each organization is a local organization directly affiliated with a common state, national, or international organization that is also exempt.
  4. Rental income from personal property is included as UBI and subject to UBIT.
  5. Mixed leases, meaning leases that include both real and personal property, are subject to a 10% rule.  The rule states that if rents attributable to personal property are not more than 10% of all rents received under the lease, all rents are excluded from UBI. If rents attributable to personal property are greater than 50% of all rents received under the lease all rents are included in UBI. If rents attributable to personal property are greater than 10% but less than 50% of all rents received under the lease, only the rents received attributable to the real property are excluded from UBI.

Nonprofit organizations should seek appropriate counsel or expertise when engaging in business activities, including the rental of real and personal property, to understand their consequences on UBI and ensure the entity can optimally engage in such activities without triggering any income taxes.

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Posted by: Christina Bell, CPA | August 15, 2014

Did you download the instructions for Form 1023-EZ before August 4, 2014?

Posted by Christina K. Bell, CPA

If you downloaded the Instructions for Form 1023-EZ before August 4, 2014, please take note of the following change:

The IRS has updated the instructions for Part 1, line 8 to allow officers, directors, and/or trustees to use the organization’s mailing address rather than their personal mailing address.

When completing Form 1023-EZ, make sure the instructions you are following are revised as of August 2014.

 

Posted by: Belfint, Lyons & Shuman, CPAs | July 22, 2014

The Gift of Giving Back Could Become More Valuable…Permanently

Posted by Jennifer Ziegler, BLS Intern

Gift if Giving BackWith several charitable giving bills awaiting a House vote, the gift of giving back could become more valuable…permanently. Certain critical charitable giving incentives expired on December 31, 2013. On May 29, 2014, the Ways and Means committee approved four individual bills which would permanently reinstate three of the expired charitable giving incentives and extend the deadline through April 15 for individuals making charitable contributions. Below is a brief summary of each individual bill.

  • H.R. 4719 (The “Fighting Hunger Incentive Act of 2014”), which would reinstate and make permanent the enhanced deduction for contributions of food inventory.
  • H.R. 4619 (The “Permanent IRA Charitable Contribution Act of 2014”), which would reinstate and make permanent the exclusion from gross income for up to $100,000 of qualified charitable distributions from an individual retirement account.
  • H.R. 3134 (The “Charitable Giving Extension Act”), which would permit an individual to elect to deduct for a taxable year charitable contributions made after the close of the taxable year but before the date the individual’s income tax return was due to be filed.
  • H.R. 2807 (The “Conservation Easement Incentive Act of 2013”), which would reinstate and make permanent some of the liberalized rules for deducting the value of charitable contributions of conservation easements.

These bills now move on to a floor vote by the House. The hope is that these bills encourage charitable giving and strengthen the financial position of nonprofit organizations so that they may continue to meet the needs of their communities.

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Posted by: Christina Bell, CPA | July 8, 2014

Follow Up to ‘Applying for Tax Exemption Just Got EZer’

Posted by Christina K. Bell, CPA

1023 EZAs a follow up to my most recent blog entitled Applying for Tax Exemption Just Got “EZ”er the IRS made available, beginning July 1, 2014, a final Form 1023-EZ on www.IRS.gov. The new EZ form must be filed online. The instructions include an eligibility checklist that applying organizations must complete before filing the form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible

The Form 1023-EZ must be filed using www.pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40, posted on www.IRS.gov.

 

Posted by: Christina Bell, CPA | June 25, 2014

Applying for Tax Exemption Just Got “EZ”er

Posted by Christina K. Bell, CPA

EZLast summer I wrote a blog entitled “IRS Determination – Why the Wait“ that described the IRS’s process for evaluating application forms of organizations applying for tax exempt status under Section 501 (c)(3). This process often took months and in some cases over a year. Well, good news has arrived this summer as the IRS just recently released a draft of Form 1023-EZ. A copy of the draft can be found here. The goal of the new form is to simplify the application and approval process and allow smaller organizations to gain exemption more easily.

Form 1023-EZ

According to the draft instructions, only certain organizations will be eligible to use the EZ form when it becomes final. Some of the organizations that will not be able to file the EZ form include churches, schools, hospitals, foreign organizations, limited liability companies, and supporting organizations. In addition, organizations that meet the following criteria cannot apply for tax exempt status using this form.

  • Have projected annual gross receipts expected to exceed $200,000 in any of the next 3 years.
  • Have annual gross receipts that exceeded $200,000 in any of the past two years.
  • Have total assets in excess of $500,000.

The Form 1023-EZ is extremely less complex than Form 1023. Form 1023 is a 26-page application while the draft EZ form consists of only 3 pages.  One of the biggest changes is that an applying organization will no longer have to submit lengthy explanations about whether they compensate officers and directors, engage in grant making, or participate in financial transactions with interested persons. The EZ form requires only a series of simple yes or no answers to these questions.  In addition, an organization will now attest that it will adhere to the following by simply checking a single box.

  • Refrain from supporting or opposing candidates in political campaigns in any way.
  • Ensure that net earnings do not inure in whole or in part to the benefit of private shareholders or individuals (that is, board members, officers, key management employees, or other insiders).
  • Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially.
  • Not be organized or operated for the primary purpose of conducting a trade or business that is not related to your exempt purpose(s).
  • Not devote more than an insubstantial part of activities attempting to influence legislation or, if a section 501(h) election was not made, not normally make expenditures in excess of expenditure limitations outlined in section 501(h).
  • Not provide commercial-type insurance as a substantial part of activities

Further, unlike Form 1023, Form 1023-EZ does not require the applicant to include multiple years of actual and/or projected financials, thus significantly reducing the preparation time of the application.

The form also encompasses a short section for those organizations that are seeking reinstatement following automatic revocation.

While the Form 1023-EZ is a huge step in improving the efficiency of the application process, organizations should carefully read the instructions when finalized by the IRS. Currently, the IRS expects to have the Form 1023-EZ and its instructions finalized by mid to late summer.

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