Month: July 2016

Tax

Tax Compliance Issues for Non-Profits

Whether you’ve just started a nonprofit, recently submitted your organization’s first Form 990, or are the executive director, it’s important not to lose sight of your obligations under federal and state tax laws. From annual filing and reporting requirements to taxes on business income and payroll compliance, here’s a quick look at what nonprofits need to know about tax compliance.

Annual Filing and Reporting Requirements: Form 990

Once you’ve applied for and received tax-exempt status under (Section 501(c)(3) and filed Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, your organization is officially a nonprofit, and is exempt from federal income tax under section 501(c)(3). Tax exempt status refers to exemption from federal income tax on income related to the organization’s mission, as well as the ability to receive tax-deductible contributions from donors.

The next step is to comply with annual filing and reporting requirements, specifically, Form 990, Return of Organization Exempt from Income Tax.

Generally, tax-exempt organizations are required to file annual returns. If an organization does not file a required return or files late, the IRS may assess penalties. In addition, if an organization does not file as required for three consecutive years, it automatically loses its tax-exempt status.

There are four different Forms 990; which form an organization must file generally depends on its gross receipts. Forms 990-EZ or 990 are used for organizations with gross receipts of less than $200,000 and with total assets of less than $500,000. Form 990 is used for nonprofits with gross receipts of less than $200,000, and with total assets less than $500,000.

Certain small organizations may file an annual electronic notice, the Form 990-N (e-Postcard). Private foundations file Form 990-PF regardless of financial status.

Form 990 is submitted to the IRS five and a half months after the end of an organization’s calendar year. For example, for nonprofits whose calendar year ends on December 31st, the initial return due date for Form 990 is May 15. If a due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.

Extended due dates of three and six months are available for Forms 990; however, for Form 990-N the due date is the “initial return due date,” e.g. May 15 and extended due dates do not apply.

NOTE: Unlike individual tax returns filed with the IRS, which may be postmarked on April 15, Forms 990 must be received (not postmarked) by the IRS before the May 15 due date.

Unrelated Business Income Taxes (UBIT)

Unrelated business income is defined as income from a trade or business which is regularly carried on and is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.

While it may come as a surprise to some, nearly all tax-exempt organizations are required to pay taxes on unrelated business income, which might include proceeds from an annual holiday card sale or souvenirs related to an educational exhibit in support of the nonprofit’s mission.

If the IRS determines that a nonprofit is significantly underreporting income from unrelated business activities, it may lose its tax-exempt status.

Employment and Payroll Compliance

Similar to for-profit companies, nonprofit organizations must comply with both federal and state payroll reporting requirements. Federal tax withholding, social security taxes, and Medicare taxes must be deposited through the Electronic Federal Tax Payment System (“EFTPS”), and the organization must file Form 941 on a quarterly basis. Nonprofits are also required to report reimbursements to employees for out-of-pocket expenses; however, nonprofits that create an accountable reimbursement plan or ARP that meets IRS guidelines are able to avoid these reporting requirements.

Stay Informed

These are just a few of the tax-compliance issues facing nonprofit organizations. If you have any questions, would like more information, or need help setting up an accountable reimbursement plan that meets IRS requirements, please call.

Business

Selling your Business

There are many reasons to sell a business. Maybe you’re in ill health or ready to retire. Or you’re tired of working all the time and now that the business is profitable you’re ready to cash in. Whatever the reason, selling a small to medium sized business is a complex venture and many business owners are not aware of the tax consequences.

If you’re thinking about selling your business the first step is to consult a competent tax professional. You will need to make sure your financials in order, obtain an accurate business valuation to determine how much your business is worth (and what the listing price might be), and develop a tax planning strategy to minimizes capital gains and other taxes in order to maximize your profits from the sale.

Accurate Financial Statements

The importance of preparing your business financials before listing your business for sale cannot be overstated. Whether you use a business broker or word of mouth, rest assured that potential buyers will scrutinize every aspect of your business. Not being able to quickly produce financial statements, current and prior years’ balance sheets, profit and loss statements, tax returns, equipment lists, product inventories, and property appraisals and lease agreements may lead to loss of the sale.

Business Valuation

Many business owners have no idea what their business is worth; some may underestimate whereas others overestimate–sometimes significantly. Obtaining a third party business valuation allows business owners to set a price that is realistic for potential buyers, while achieving maximum value.

Tax Consequences of Selling

As a business owner you probably think of your business as a single entity sold as a lump sum. The IRS however, views a business as a collection of assets. Profit from the sale of these assets (i.e. your business) may be subject to short and long-term capital gains tax, depreciation recapture of Section 1245 and Section 1250 real property, and federal and state income taxes.

For IRS purposes each asset sold must be classified as capital assets, depreciable property used in the business, real property used in the business, goodwill, or property held for sale to customers, such as inventory or stock in trade. Assets are considered tangible (real estate, machinery, and inventory) or intangible (goodwill or trade name).

The gain (or loss) on each asset sold is figured separately. For instance, the sale of capital assets results in capital gain or loss whereas the sale of inventory results in ordinary income or loss, with each taxed accordingly.

Depreciable property

Section 1231 gains and losses are the taxable gains and losses from Section 1231 transactions such as sales or exchanges of real property or depreciable personal property held longer than one year. Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your Section 1231 transactions.

When you dispose of depreciable property (Section 1245 property or Section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Any remaining gain is a Section 1231 gain.

Business structure

Your business structure (i.e. business entity) also affects the way your business is taxed when it is sold. Sole proprietorships, partnerships, and LLCs (Limited Liability Companies) are considered “pass-through” entities and each asset is sold separately. As such there is more flexibility when structuring a sale to benefit both the buyer and seller in terms of tax consequences.

C-corporations and S-corporations have different entity structures and sale of assets and stock are subject to more complex regulations.

For example, when assets of a C-corporation are sold, the seller is taxed twice. The corporation pays tax on any gains realized when the assets are sold, and shareholders pay capital gains tax when the corporation is dissolved. However, when a C-corporation sells stock the seller only pays capital gains tax on the profit from the sale, which is generally at the long-term capital gains tax rate. S-corporations are taxed similarly to partnerships in that there is no double taxation when assets are sold. Income (or loss) flows through shareholders, who report it on their individual tax returns.

Need help?

As you can see, selling a business involves complicated federal and state tax rules and regulations. If you’re thinking of selling your business in the near future don’t hesitate to call the office and schedule a consultation with a tax and accounting professional.

Tax

Tax Due Dates for July 2016

July 11

Employees Who Work for Tips – If you received $20 or more in tips during June, report them to your employer. You can use Form 4070.

July 15

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in June.

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in June.

August 1

Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2016. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.

Employers – Federal unemployment tax. Deposit the tax owed through June if more than $500.

Employers – If you maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar-year 2015. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends.

Certain Small Employers – Deposit any undeposited tax if your tax liability is $2,500 or more for 2016 but less than $2,500 for the second quarter.

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