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What to do if tax exempt status is revoked

revoked stampI received a question from Brenda in Michigan, and I think that the answer will be helpful to other readers, as well:

Question:

I filed my 2012 Form 990 late and the IRS revoked my status. They said my attorney put my start date as 2007. I filed for NPO status in 2010. So I fell into the 3 years. They said I have to start all over again (1023) for reinstatement. I filed for Michigan exemption only in 2007; not federal. Please advise.

Answer from Lisa Potter:

Thanks for your question.  Every nonprofit organization has an annual filing requirement (except churches), and if any organization fails to file one of the three types of 990 forms for three years in a row, their exempt status is automatically revoked.  Additionally, there are no extensions available for the Form 990-N, which is not widely known.  If you extend your return, you must file either the 990-EZ or the long Form 990.

Unfortunately, there is no way to magically undo this.  The only way to regain exempt status is to file Form 1023 again.  If the organization is still doing the same thing you should be able to basically copy your original Form 1023 onto the latest version of the form, and update it for the current information and programs.

Michigan has its own annual filing requirements, such as renewing a charitable solicitation license annually, and it must file an annual report.  I am not certain of your organization’s specific filing requirements in Michigan. However, it is possible your organization is not required to register.  I suggest you contact your legal counsel to find out if you need to re-file for exemption in Michigan.  It is possible your Michigan status has not changed if you have kept up with all the required state filings.

Changes in Form 990 for Tax Year 2012

Changes to Form 990 instructions and schedules clarify and modify how organizations report information and income. You can see the full list of changes on the IRS Web site. But here are a few of the highlights that may have an impact on your preparation of information before you begin filling in the form:

 

–          Remember that you don’t want to include any social security numbers on the Form, because both you and the IRS are required to share the Form 990 with inquirers about your organization.

–          Reporting average hours per week worked for related organizations in addition to hours worked for your organization is required for officers, directors, trustees, key employees, highly compensated employees, and independent contractors.

–          Insurance providers are not considered independent contractors.

–          You no longer need to use a Schedule K-1 to report your share of revenue of joint ventures and other partnerships. You can simply report the information according to your books and records.

–          If you have an outstanding receivable on a loan to an interested person, you must complete Schedule L, Part II.

–          Under reconciliation of Net Assets (Part XI), you need to provide net unrealized gains/losses on investments, donated services for use of facilities, investment expenses, and prior period adjustments. This is now applicable to all nonprofit organizations, not just those exempt under 501(c)(3).

–          The revised definition of ‘professional fundraising services’ includes preparation of applications for grants or other assistance.

–          When acknowledging a donor for a contribution to a specific one of your programs, you must include the organization name. For example:  “Thank you for your contribution of $300 to Good Deeds Organization made in the name of our Special Relief Fund program. No goods or services were provided in exchange for your contribution.”

–          Even if you did not receive non-cash property during the year, the pledge of such property must be reported by checking the “noncash” box on Schedule B, Part I, and completing Schedule B, Part II.  Note that Schedule B should always be completed using the same accounting method the organization uses to complete the main Form 990.

 

Please comment and let me know if you think other parts of the 2012 Form 990 need clarifying and I’ll answer your question.

 

 

When a Donation Isn’t a Tax-Deductible Donation

Donors who contribute to tax-exempt 501(c)(3) organizations want to believe that all donations are tax deductible. However, if you have a gaming activity such as bingo, split-the-pot, raffles, keno or pull-tabs, the amount donated for such an event is not considered tax deductible by the IRS. Even one raffle at an event is considered a gaming activity.  However only the raffle proceeds from the event are counted as gaming.  Other non-gaming revenues would be reported as regular special event activity.

 

Why this is important

If your organization has regular events where there is gaming activity, then the money raised is considered unrelated business income (UBI). UBI is subject to tax and also requires the Form 990-T. If UBI is excessive, then the tax-exempt status of an organization may be at risk. There is no formal guidance as to how much UBI (gaming and non-gaming) will jeopardize an organization’s exempt status. The IRS makes their determination on a case-by-case basis. However, the gray area that may cause the IRS to look into an entity seems generally to be when the UBI gets to be somewhere in the range of 10 to 15% of total revenue. They also consider the promotion of the activity and compare similar organizations’ use of gaming for fundraising. The best way to avoid the UBI tax is by limiting the number and/or frequency of gaming activities. (more…)

5 Taxpayer Relief Provisions related to Tax-Exempt Organizations

The American Taxpayer Relief Act of 2012, the one enacted to avert the ‘fiscal cliff,’ has five provisions that are especially related to tax-exempt organizations. The first four you may remember expiring December 31, 2011. These are officially reinstated, and may be counted as retroactive to January 1, 2012.

 

  1. Corporate contributions of stock: Shareholders of S Corporations previously had to reduce their shareholder basis by the pro-rata share of the property’s fair market value. The reinstated provision allows the shareholder taxpayer to reduce the basis by the pro-rata share of the corporation’s basis of the contributed stock.
  2. Contributions from Traditional and Roth IRA’s: For tax years 2012 and 2013 only, a 70 ½ or older taxpayer may contribute up to $100,000 from an IRA without including the amount in gross income. Because this provision is retroactive, a taxpayer that took out a distribution in 2012 and made a donation to charity can treat the amount as an eligible rollover. This is good news to share with your 2012 donor base.
  3. Food inventory donations: Businesses who donate food to tax-exempt organizations may take up to a 10 percent aggregate net income deduction. (‘Food’ is defined as ‘apparently wholesome food’ – intended for human consumption.)
  4. Real estate conservation-purpose contributions: If donated real property qualifies for conservation use, then the charitable deduction is now 50 percent instead of 30 percent of the taxpayer’s contribution base.
  5. Limit on deductibility of charitable contributions: For individual incomes of $250,000 or more and married joint returns with $300,000 or more income, many itemized deductions, such as charitable donations, will have reduced deductibility. The calculation is: reduce total itemized deductions by the lesser of three percent of AGI over the threshold or 80 percent of the itemized deductions.

 

It is always advisable to refer your donors to personal tax preparers for the effect on individual tax situations. However, by having an understanding of the new rulings, your organization may gain insight on strategies to increase giving from current and prospective donors.

 

 

 

 

Acknowledging donors and prize winners

The IRS is very specific about the way that tax-exempt organizations must recognize donations. You probably know that you have to prepare receipts for cash/check/credit card contributions of $250 or more. Remember to include the following on the receipt:

– Donor name and amount given

– Statement that no goods or services were provided in exchange for the gift

– Religious organizations must include that ‘intangible religious benefits’ were provided with no monetary value for tax purposes

Cash + goods/services

Where goods or services are provided, such as a dinner, donations greater than $75 also need written recognition. You must state that the amount deductible is limited to the amount in excess of the value of the goods or services provided. You must also provide a written statement of a good faith estimate for the value. Read more about quid pro quo contributions.

Non-cash items valued at $5,000 or more

If you dispose of a donation valued at $5,000+ within three years, then you need to file Form 8282 within 125 days of disposing of the item. If a) the items are consumed or distributed for charitable purposes, or b) the item has appraised value of a specific item was $500 or less, and the organization is provided Form 8283 as proof –then- Form 8282 is not required.

Cars/boats/airplanes File Form 1098-C from the IRS if you received a donation of a car, boat or plane. Call 800-829-3676 and ask for five copies.

Prizes

If you award prizes for fundraisers such as sweepstakes or bingo, you need to file a Form W-2G prior to January 31 in the year following the one in which the prize was awarded. (Or, you can file the form when you distribute the prize.) The rules regarding federal withholding can be complex for prizes. It is best to reference the IRS instructions.

For the full story on charitable contributions, see IRS Publication 526.

What tax exempt organizations need to know about disclosure

Two types of disclosure are: 1) information about your organization and 2) information that your donor needs when they make a contribution. Today’s post covers what you need to provide regarding information about your organization.

Tax exempt organizations need to be prepared to make annual tax returns (all forms related to the 990) and exemption applications available for public inspection – immediately if it’s an in-person request, and within 30 days if the request comes by mail, email or fax. Here are some of the details that are helpful to know:

 
–          If your organization has regional or district employees with three or more employees, then those offices must also be prepared to respond to requests.

–         You need to have available your application for tax exempt status and the last three years of returns, including schedules and attachments.

–         Unless you are a private foundation, you do not have to disclose the name and address of any contributor.

–         You may charge a reasonable copying fee (and postage, if applicable) for each request. Reasonable may be defined by the government’s current charge for copying Freedom of Information Act materials, which is .20 per page.

–         You do not have to provide copies if your information is posted online in an easily readable format, such as a pdf. This is considered widely available information. You can direct requests to the online access for information. However, you must still have documents available for public inspection.

I like to provide you with an overview of topics in my blog posts to answer the most common questions. If you need more detailed information, visit the IRS Web site.

Raffle issues for nonprofit organizations

A recent question likely applies to many nonprofit organizations:

Does an American Express Gift Card qualify as cash as defined by the Texas Charitable Raffle Law?

Here’s the answer:

Gift cards can be a confusing area.  The IRS looks upon gift cards as cash, so an American Express Gift Card, in my opinion, would also be a prohibited raffle prize in Texas.  There are some schools of thought where other types of gift cards that must be used at a particular store are okay.  For example, a gift card that must be used at a particular grocery store or clothing store.  Even though these are easily sold over the internet, they are not quite as effortlessly converted to cash. Money is not permitted as a prize, and the definition of money is coins, paper currency or a negotiable instrument that represents and is readily convertible to coins or paper currency. However, the most conservative approach is to provide a noncash item as the raffle prize.

If you want to be absolutely certain your particular type of gift card is allowed, you can call the Texas Attorney General’s Consumer Protection & Public Health Regional Offices.  Their contact information is available at https://www.oag.state.tx.us/consumer/cpd_regionals.shtml

Qualifying to hold a raffle

The Charitable Raffle Enabling Act (January 1, 1990) states that qualified organizations may hold up to two raffles per calendar year. To qualify, your organization must have existed for at least three preceding years and be exempt from federal income tax – IRS Section 501(c). Other qualifiers:

–         Any organizational income must not be distributed to members, officers, or a governing body.

–         A substantial portion of activities must not be engaged in influencing legislation.

–         The organization doesn’t participate in political campaigns.

If the organization is primarily for religious purposes, it must be in existence in Texas for at least 10 years.

 

Profit for a nonprofit – a good problem to have

Many nonprofit organizations’ fundraising activities are so successful that they generate a surplus of profit. To maintain nonprofit status, what the organization does with the surplus is critical. It is especially important that profits not be distributed to individuals associated with the organization, regardless of the amount. Options include reinvesting the surplus into the organization’s tax-exempt purpose, creating an endowment, building up savings, or revising your pricing structure for events or activities.

For reinvestment, take a look at projects that can expand your mission within your stated tax-exempt purpose.

Endowments are a way to ensure financial stability and let the money work for you with investments that generate revenue. An endowment is also attractive to certain types of donors – those who want to build into an organization for the future as opposed to short-term needs. Your organization is able to plan for future physical needs or mission-related opportunities.

Before you get too excited about surplus income, make sure that your income sources are proportional. Too much income from activities outside of your tax-exempt purpose (such as rental property) generates unrelated business income. This income can endanger your tax-exempt status.

 

September tax deadlines & a reminder

Two upcoming deadlines, both September 17, 2012 will affect a large number of nonprofit organizations. For nonprofits which use a calendar year for accounting, quarterly tax payments are due. Here are the details:

–         Pay quarterly tax payment if you expect $500 or more income from unrelated business income tax. (Examples of UBIT are rent from certain types of property and gaming income, such as bingo.) See Filing your return for UBIT for more information.

–         Complete Form 990-W for estimated taxes.

–         Deposit payments electronically using the IRS’ Electronic Federal Tax Payment System (EFTPS).

A second deadline is for self-employed workers who do not voluntarily withhold federal income tax. Their third quarter tax payment is due on September 17, 2012.

Of course, the regular semiweekly and monthly withholding requirements apply as usual.

Writing about deadlines makes it a good time to give you a gentle reminder about record-keeping. Especially when you are a 501(c)(3) tax-exempt organization, you need pristine records. Here is a checklist of records needed to make sure that you are ready for tax preparation and/or an audit:

–        Cash/check contributions of $250 or more

–        Non-cash items valued at $5,000 or more

–        Car, boat or plane donation to the church

–        Personnel records for each employee (Form W-4 with accurate name, address, SSN, withholding status)

–        Independent contractor payment records

–        Reimbursements

–        Health insurance and other insurance policies

–        Bank statements

–        501(c)(3) letter

There’s no deadline on recordkeeping, but life is easier when everything is kept current and in an easily accessible location.

 

 

Accounting policies – your opinion counts

The AICPA recently released a proposed guide to tackle current issues faced by nonprofit organizations. It’s a working guide, so nothing is definitive – yet. You have an opportunity to review the proposed issues that affect your organization and provide feedback by October 15, 2012. And your opinion, combined with that of other nonprofit organizations, can make an impact on policies that may have long-term consequences to your organization. Here are some of the issues that are addressed:

–         Reporting relationships with other entities, including for-profit companies and other nonprofit organizations, partnerships and groups with whom you have a financial relationship.

–         Measuring and reporting all non-cash gifts and in-kind services, including the definition of fair value.

–         Valuing investments initially and accounting for gains or declines, including endowment funds.

–         Accounting for debt, such as municipal bonds, third-party credit, debt modifications and classification of debt.

–         Navigating the tax and regulatory environment for nonprofit organizations, including governance and executive compensation.

Other topics in the guide include a discussion of financial and cash flow statements, mergers and acquisitions, split interest agreements, recognition of donations, and accounting for tangible and intangible assets. There are more topics than listed here; it’s a very comprehensive guide. I recommend that you at least look at the table of contents to see which issues are relevant to your organization.

While the guide released by the AICPA Financial Reporting Executive Committee (FinREC) is created for CPAs working with nonprofit entities, it is your organization that will be ultimately affected by the policies. Download the guide, Not-for-Profit Entities, and let the AICPA know your suggestions or concerns.