Nancy L.

GONSIOREK CPA LLC

Servicing the Tax and Accounting Needs of Nonprofit Organizations

Information Center

The Nonprofit Checkup: Program Fees and Contributions are Like Oil and Water  © 2012 Nancy L. Gonsiorek, CPA, LLC

Today’s topic is one that doesn’t exactly please my clients.  However, I remind them that I am the “Princess of Doom.”  It is my job to think of all the bad things that can happen and then avert any impending crisis!  So today’s topic is the “Booster Club.”  Keep in mind that “Booster Clubs” include high school boosters but also youth athletic organizations, fine arts groups and other charitable organizations offering programs for a fee, not just those that call themselves Boosters.  Using this IRS definition a very large sector of our community has involvement with a Booster Club; as a Board Member, active volunteer, or parent of a child participant.  In the eyes of the IRS, this has been an area of substantial abuse; so much in fact, that IRS Tax-Exempt Director Lois Lerner placed Booster Clubs on her annual “Work Plan” as an area requiring review.  Clearly the object of Ms. Lerner’s affection here is the propensity for Booster Clubs to comingle program service fees and charitable contributions, which is a big no-no.

 

 Many organizations seek creative ways to fundraise, to defray the cost of programs.  One of the most common methods of fundraising involves students raising money to pay for trips, camps, uniforms, etc. Whether the students are selling candy, sponsorship ads in a program book, or simply seeking cash donations, the problem arises when the charity implements the concept of “Participant Designated Accounts.”  Here’s how it works:  the organization initiates a program where the student or program participant earns direct credit toward their own program fees, camp, or trip cost based on that individual’s level of volunteer work or the amount of funds they raise on behalf of the organization.  This practice is extremely prevalent but creates tax consequences for both the organization and the participant.  In fact, it can result in the loss of tax-exempt status.

 

 The primary issue for the IRS is a payroll issue because amounts credited to an individual student’s account are taxable wages. Observance of the situation may prompt the IRS to initiate a payroll tax examination and assess taxes and penalties on the unreported compensation.  In fact, several Booster Clubs have been subject to such examinations with taxes and penalties assessed in the tens of thousands of dollars!

 

 Additional concerns for the organization include assessment of income taxes because the fundraising is now conducted by paid employees and not volunteers.  The most severe situation is the risk that the organization has violated the rule of “Private Benefit:” Organizations exempt under IRC Sec. 501(c)(3) may not operate for the substantial private benefit of any individual.  For small to medium-sized organizations, this fundraising activity may be a substantial portion of revenues. Substantial Private Benefit will jeopardize the tax-exempt status of the organization.  These consequences are extremely severe and they deserve consideration when planning program and/or fundraising activities.

 

I know what you’re thinking, because my clients have already told me -- everyone does it.  Yes, many organizations do it, but it doesn't make it right.   So remember: whether you are selling candy to cover some of your program expenses, soliciting contributions for a mission trip, or simply placing a volunteer requirement on every parent in your athletic program; program fees and contributions are like oil and water.  They just don’t mix.

 

Nancy Gonsiorek is a Certified Public Accountant providing audit, tax and consulting services to nonprofit organizations.  Her firm, Nancy L. Gonsiorek, CPA, LLC is based in Crystal Lake.  She can be reached at 815-455-9462 or via email at NancyGonsiorek@comcast.net.

 

Circular 230 Disclosure: Any advice contained in this written communication (including any attachments unless expressly stated otherwise) is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

The Nonprofit Checkup: The Two Sides of State Sales Tax Exemptions, Part 1 © 2013 Nancy L. Gonsiorek, CPA, LLC

I often remind nonprofit leaders that the privilege of being exempt from federal and state income tax does not extend to other areas of taxation.  IRS tax-exempt status does not apply to most payroll taxes, certain excise and business income taxes, and state sales tax, which is today’s topic.  In fact, we are seeing heightened compliance efforts by state and local governments nationwide with respect to sales tax audits of nonprofits.  As you may be aware, many of our governmental units are a bit short of cash these days and are looking high and low for additional revenues. Nonprofits can be an easy target for additional revenue because many nonprofit leaders are not aware of the rules.

 

The first step in understanding the responsibilities of a nonprofit organization with respect to state sales tax is knowing that you have two sets of responsibilities: as both buyer and seller.  Also important to know is that, unless specifically exempted, your responsibilities are the same as a for-profit business.  That means you are required to pay sales tax on purchases, and to collect and remit sales tax on sales.  Many organizations get the purchasing side right, because retailers enforce those rules.  However, there is often confusion regarding when to charge sales tax on sales, and remit that tax to the state via the filing state sales tax returns.

 

Today’s topic is the exemption allowed nonprofits for purchases.  Please visit this column next month as I continue our sales tax discussion with collection and remittance.  I will focus on the rules for Illinois, however; if you are conducting activities across state lines you may have multi-state considerations.

 

The Illinois Department of Revenue (IDOR) is our state reporting agency for sales tax and the authority that determines the applicable exemption.  The IDOR exemption and associated “E-Number” allows you to make sales-tax-free purchases, and requires renewal once every five years.   There are limits on the exemption.  First, the exemption should be used only for purchases of merchandise used for your tax-exempt purpose.  Secondly, the IDOR has become increasingly discerning when granting sales tax exemptions. Only “true” Illinois charitable organizations are “worthy” of the E-Number – just having an IRS exemption under section 501(c)(3) is not enough.  An important point to remember is your IRS tax-exempt letter and your IDOR tax-exempt letter are not interchangeable!

 

The benefit of having the E-Number is purely economic: if an organization does not have to pay sales tax, there is more money to support programs.  So how do you obtain the E-number?  The IDOR provides an application process with specific criteria.  You must provide them:

 

  1. Articles of incorporation, if incorporated, or constitution, if unincorporated.
  2. By-laws.
  3. IRS letter, respecting federal tax-exempt status, if your organization has one.
  4. Most recent financial statement (religious organizations do not need to submit a financial statement with the initial request).
  5. A brief narrative that explains purposes, functions, and activities of your organization.
  6. Brochures or other printed material explaining the purposes, functions, and activities of your organization.
  7. Any other information that describes the purposes, functions, and activities of your organization

 

 

Applications are reviewed and determinations made on a case-by-case basis.  It has become increasingly important to take the time to prepare a thorough application, and don’t forget to make it easy to review.  Remember: our state agencies are becoming less inclined to willingly forgo revenue.  Consequently, IDOR representatives are scrutinizing applications, especially your purpose and functions (items 5 and 6, above).   However, if you can demonstrate you are worthy, the state sales tax exemption will provide savings that will contribute to your bottom line.

 

Nancy Gonsiorek is a Certified Public Accountant providing audit, tax and consulting services to nonprofit organizations.  Her firm, Nancy L. Gonsiorek, CPA, LLC is based in Crystal Lake.  She can be reached at 815-455-9462 or via email at NancyGonsiorek@comcast.net.

 

Circular 230 Disclosure: Any advice contained in this written communication (including any attachments unless expressly stated otherwise) is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

The Nonprofit Checkup: The Three G’s of Charitable Contributions: Golf, Giving and Gratitude © 2012 Nancy L. Gonsiorek, CPA, LLC

Being a self-proclaimed “Tax Geek” is a bit like being a three-year-old:  I don’t just follow the law, I have to ask, “Why?”  That has certainly come in handy when digesting and understanding the myriad of regulations enforced by our friends at the IRS.  And just to be clear, your beef should not be solely directed at the IRS.  Congress makes up the laws, the IRS is the agency charged with implementation and enforcement.

 

So back to the “Why?”  Often IRS rules seem silly or punitive or both.  But not if you take Nancy’s Toddler Approach to Tax Law and ask, “Why?”  For example, a few months ago, this newspaper published a Letter to the Editor that caught my eye.  It was written by an esteemed colleague and fellow CPA.  She had learned of a recent court case that disallowed a tax deduction for a charitable contribution because the donor did not have a “contemporaneous written acknowledgement,” or CWA.  To most of us, that is called “a Thank You Letter.” My colleague wanted to give our community a heads-up:  For every contribution you make, you must have a written acknowledgement from that charitable organization.  In fact, for contributions of $250 or more, your cancelled check will not suffice – you must have a CWA in order to claim the deduction.  At first glance, you may be perplexed by this requirement but when you understand its purpose, it makes perfect sense.

 

In 2006, Congress passed the Pension and Protection Act of 2006.  Sweeping reforms were made with respect to tax-exempt organizations in an attempt to curb abuses by taxpayers.  There are recordkeeping and substantiation rules imposed on donors of charitable contributions and disclosure rules imposed on charities that receive certain quid pro quo contributions:

 

  • A donor must have a bank record or written communication from a charity for any monetary contribution before the donor can claim a charitable contribution on his/her federal income tax return.
  • A donor is responsible for obtaining a contemporaneous written acknowledgment (CWA) from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return.
  • A charitable organization is required to provide a written disclosure to a donor who receives goods or services in exchange for a single payment in excess of $75.
  • A donee organization must state in the CWA whether goods or services have been given or received in exchange for said contribution.

 

You can see that the IRS has placed responsibility on both the donor and the donee organization to properly report charitable contributions.  Seems crazy?  Not really.  I call this the “Golf-Outing Rule.”  The federal government loses millions every year from improperly prepared tax returns.  One area of concern is the deduction allowed for a charitable contribution as it pertains to fundraising events.  This is your golf outing, dinner dance, silent-auction purchase, or any other creative avenue of fundraising activity conducted by an exempt organization.  These are quid pro quo contributions: part purchase, part contribution.  Many taxpayers want to claim a deduction for the total ticket price for the event; however, the allowable deduction is the difference between the consideration given and the value of goods and services received.   Plain and simple, the purchase (i.e. round of golf, dinner, et. al.) is not an allowable deduction.

 

So now it all makes sense. You may call it crazy, but I call it genius – the federal government has essentially “deputized” tax-exempt organizations and tax preparers as enforcers of the Golf-Outing Rule.  Whether you are an individual, organization, or a tax return preparer, take notice: you will probably be affected by the 3 G’s of Charitable Contributions.

 

Nancy Gonsiorek is a Certified Public Accountant providing audit, tax and consulting services to nonprofit organizations.  Her firm, Nancy L. Gonsiorek, CPA, LLC is based in Crystal Lake.  She can be reached at 815-455-9462 or via email at NancyGonsiorek@comcast.net.

 

Circular 230 Disclosure: Any advice contained in this written communication (including any attachments unless expressly stated otherwise) is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

New challenges for 2014 year-end tax planning

Before the fast-approaching new year, it’s important to take some time and reflect on year-end tax planning. The weeks pass quickly and the arrival of January 1, 2015 will close the doors to some tax planning strategies and opportunities. Fortunately, there is still time for a careful review of your year-end tax planning strategy. Traditional year-end planning techniquesFor many individuals, a look at traditional year-end tax planning techniques is a good starting point. Spreading the recognition of certain income between 2014 and 2015 is one technique. Individuals need to take into account any possible changes in their income tax bracket. The individual income tax rates for 2014 are unchanged from 2013: 10, 15, 25, 28, 33, 35 and 39.6 percent. Each taxable income bracket is indexed for inflation. The starting points for the 39.6 percent bracket for 2014 are $406,750 for unmarried individuals; $457,600 for married couples filing a joint return and surviving spouses; $432,200 for heads of households; and $228,800 for married couples filing separate returns. For 2014, the top tax rate for qualified capital gains and qualified dividends is 20 percent. For the second year, individuals also need to plan for potential net investment income (NII) tax liability. The NII tax applies to taxpayers with certain types of income and who fall within the thresholds for liability. Again, spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions are strategies to consider. Tax extendersMany individuals are surprised to learn that some very popular and widely-used tax incentives are temporary. If you claimed the higher education tuition deduction on your 2013 return, you cannot claim it in your 2014 return because the deduction expired after 2013. The same is true for the state and local sales tax deduction, the teachers’ classroom expense deduction, the Code Sec. 25C residential energy credit, transit benefits parity, and more. All of these tax breaks expired after 2013 and unless they are extended by Congress, you will not be able to claim them on your 2014 returns. Businesses are also affected. A lengthy list of business-oriented tax breaks expired after 2013. They include the Work Opportunity Tax Credit (WOTC), research tax credit, Indian employment credit, employer wage credit for military reservists, special incentives for biodiesel and renewable fuels, tax credits for energy-efficient homes and appliances, and more. The good news is that Congress is likely to extend these tax breaks, probably for two years, and make the extension retroactive to January 1, 2014. That means taxpayers can claim these incentives on their 2014 returns. One hurdle is when Congress will act. In past years, lawmakers waited until very late in the year, or even until the start of the new year, to vote on an extension of these incentives. Late extension puts extra pressure on the IRS to quickly reprogram its return processing systems. Most likely, the IRS will have to delay the start of the filing season. Our office will keep you posted of developments. Retirement savingsIn 2014, the Tax Court surprised many with its decision that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained (Bobrow, TC Memo. 2014-21). The one-year limitation is not specific to any single IRA maintained by a taxpayer, but instead applies to all IRAs maintained by the taxpayer. The IRS, in turn, announced that it would change its rules to reflect the court’s decision. The key point to keep in mind is that the Bobrow decision affects only IRA-to-IRA rollovers. The decision does not limit trustee-to-trustee transfers. Affordable Care ActIndividuals who obtain health insurance through the Affordable Care Act Marketplace (and the federal government estimates they number seven million) have special tax planning considerations, especially if they are eligible for the Code Sec. 36B premium assistance tax credit. The credit is payable in advance to insurers and it appears that most taxpayers have elected this option. These individuals must reconcile the amount paid in advance with the amount of the actual credit computed when they file their tax returns. Changes in circumstances, such as an increase or decrease in income, marriage, birth or adoption of a child, and so on, may affect the amount of the actual credit. Remember that the Affordable Care Act requires individuals to have minimum essential coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return. Many individuals will qualify for an exemption if they are covered under employer-sponsored coverage. Individuals covered by Medicare also are exempt. If you have any questions about year-end planning, please contact our office. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Wolters Kluwer, CCH projects 2015 tax rate brackets and other tax figures adjusted for inflation

Taxpayers will receive some modest relief for the 2015 tax year, thanks to the mandatory annual inflation-adjustments provided under the Tax Code. When there is inflation, indexing of brackets lowers tax bills by including more of people’s incomes in lower brackets—for example by placing taxpayers’ income in the existing 15-percent bracket, rather than the existing 25-percent bracket. Wolters Kluwer, CCH has used the formulas specified in the Tax Code and the Department of Labor’s newly-released Consumer Price Index (all urban) for August 2014 to project the inflation-adjusted figures for 2015. (The list provided below is not exhaustive.) The IRS is expected to issue the official figures by December 2014. 2015 tax schedules Married Filing Jointly (and Surviving Spouses)Not over $18,450  –  10% of taxable income$18,450 to $74,900  –  $1,845 + 15% of taxable income in excess of $18,450$74,900 to $151,200  –  $10,312.50 + 25% of taxable income in excess of $74,900$151,200 to $230,450  –  $29,387.50 + 28% of taxable income in excess of $151,200$230,450 to $411,500  –  $51,577.50 + 33% of taxable income in excess of $230,450$411,500 to $464,850  –  $111,324 + 35% of taxable income in excess of $411,500Over $464,850  –  $129,996.50 + 39.6% of taxable income in excess of $464,850 Head of HouseholdNot over $13,150  –  10% of taxable income$13,150 to $50,200  –  $1,315 + 15% of taxable income in excess of $13,150$50,200 to $129,600  –  $6,872.50 + 25% of taxable income in excess of $50,200$129,600 to $209,850  –  $26,722.50 + 28% of taxable income in excess of $129,600$209,850 to $411,500  –  $49,192.50 + 33% of taxable income in excess of $209,850$411,500 to $439,000  –  $115,737 + 35% of taxable income in excess of $411,500Over $439,000  –  $125,362 + 39.6% of taxable income in excess of $439,000 Single (Other than Heads of Household and Surviving Spouses)Not over $9,225  –  10% of taxable income$9,225 to $37,450  –  $922.50 + 15% of taxable income in excess of $9,225$37,450 to $90,750  –  $5,156.25 + 25% of taxable income in excess of $37,450$90,750 to $189,300  –  $18,481.25 + 28% of taxable income in excess of $90,750$189,300 to $411,500  –  $46,075.25 + 33% of taxable income in excess of $189,300$411,500 to $413,200  –  $119,401.25 + 35% of taxable income in excess of $411,500Over $413,200  –  $119,996.25 + 39.6% of taxable income in excess of $413,200 Married Filing SeparateNot over $9,225  –  10% of taxable income$9,225 to $37,450  –  $922.50 + 15% of excess over $9,225$37,450 to $75,600  –  $5,156.25 + 25% of excess over $37,450$75,600 to $115,225  –  $14,693.75 + 28% of excess over $75,600$115,225 to $205,750  –  $25,788.75 + 33% of excess over $115,225$205,750 to $232,425  –  $55,662 + 35% of excess over $205,750Over $232,425  –  $64,998.25 + 39.6% of excess over $232,425 Estates and TrustsNot over $2,500  –  15% of taxable income$2,500 to $5,900  –  $375 + 25% of taxable income in excess of $2,500$5,900 to $9,050  –  $1,225 + 28% of taxable income in excess of $5,900$9,050 to $12,300  –  $2,107 + 33% of taxable income in excess of $9,050Over $12,300  –  $3,179.50 + 39.6% of taxable income in excess of $12,300 2015 personal exemptionFor 2015, personal exemptions will increase to $4,000, up from $3,950 in 2014. The phase out of the personal exemption for higher income taxpayers will begin after taxpayers pass the same income thresholds set forth for the limitation on itemized deductions, detailed below.  The personal exemption will completely phase out when income surpasses the following levels: $432,400 (married joint filers); $406,550 (Heads of household); $380,750 (unmarried taxpayers); and $216,200 (married filing separate). 2015 standard deductionFor 2015, the standard deduction will be as follows: $6,300 for unmarried taxpayers and married separate filers (up from $6,200 in 2014). For married joint filers, the standard deduction will rise to $12,600, up from $12,400 in 2014. For heads of household, the standard deduction will be $9,250, up from $9,100 in 2014.  The 2015 standard deduction for an individual claimed as a dependent on another taxpayer’s return is either $1,050 or $350 plus the dependent’s earned income, whichever is greater. The additional standard deduction for the blind and aged increases for married taxpayers to $1,250, up from $1,200 in 2014. For unmarried, aged, or blind taxpayers, the amount of the additional standard deduction remains $1,550. Limitation on itemized deductions• For higher income taxpayers who itemize their deductions, the limitation on itemized deductions for 2015 will be imposed at the following income levels:• For married couples filing joint returns or surviving spouses, the income threshold will be $309,900, up from $305,050 for 2014.• For heads of household, the threshold will be $284,050, up from $279,650 in 2014.• For single taxpayers, the threshold will be $258,250, up from $254,200 in 2014.• For married taxpayers filing separate returns, the 2015 threshold will be $154,950, up from $152,525 for 2014. AMT exemptionsWolters Kluwer, CCH projects that, for 2015, the AMT exemption for married joint filers and surviving spouses will be $83,400 (up from $82,100 in 2014). For heads of household and unmarried single filers, the exemption will be $53,600 (up from $52,800 in 2014). For married separate filers, the exemption will be $41,700, up from ($41,050 in 2014). For estates and trusts, the exemption will be $23,800 (up from $23,500 in 2014.) For a child to whom the so-called “kiddie tax” under Code Sec. 1(g) applies, the exemption amount for AMT purposes may not exceed the sum of the child’s earned income for the tax year, plus $7,400 (up from $7,250 for 2014). Other adjusted amounts IRA Contributions. The maximum amount of deductible contributions that can be made to an IRA will remain the same for 2015, at $5,500 (or $6,500 for taxpayers eligible to make catch-up contributions). The income phase out ranges increase, however. For 2015, the allowable amount of deductible IRA contributions will phase out for married joint filers whose income is between $98,000 and $118,000 (if both spouses are covered by a retirement plan at work). If only one spouse is covered by a retirement plan at work, the phase out range is from $183,000 to $193,000. For heads of household and unmarried filers who are covered by a retirement plan at work, the 2015 income phase out range for deductible IRA contributions is $61,000 to $71,000, up from $60,000 to $70,000 for 2014. Education Savings Bond Interest Exclusion. When U.S. savings bonds are redeemed to pay expenses for higher education, the interest may be excluded from income if the taxpayer’s income is below a certain range. For 2015, the phase-out range for single filers will be from $77,200 to $92,200 (up from $76,000 to $91,000 for 2014). For joint filers the 2015 phase-out range will be $115,750 to $145,750 (up from $113,950 to $143,950 for 2014). Phase-out of Student Loan Interest Deduction. For 2015, the $2,500 student loan interest deduction will phase out for married joint filers with income between $130,000 and $160,000, the same as for 2014. The 2015 deduction will phase out for single taxpayers with income between $65,000 to $80,000. Medical Savings Accounts. The minimum–maximum range for premiums used to determine whether a medical savings account (MSA) is tied to a high deductible health plan for 2015 will be $2,200–$3,300 for self-only coverage (up from $2,200 to $3,250 for 2014) and $4,450 to $6,650 for family coverage (up from $4,350 to $6,550 for 2014). Self-only coverage plans are subject to a $4,450 maximum amount for annual out-of-pocket costs (up from $4,350 for 2014). Family coverage plans have a $8,150 annual limit (up $8,000 for 2014). Limitation on Flexible Spending Arrangements (FSAs). The limitation on the amount of salary reductions an employee may elect to contribute to a cafeteria plan under an FSA increases to $2,550 for 2015, up $50 from the limit for 2014 and 2013. Qualified Transportation Fringe Benefits. For 2015, the monthly cap on the exclusion for transit passes and for commuter highway vehicles will be $130, the same as it was for 2014 (parity between transit and parking benefits expired at the end of 2013). The monthly cap on qualified parking benefits will be $250, the same as for 2014. Estate and Gift Tax. The gift tax annual exemption will remain the same for 2015, at $14,000. However, the estate and gift tax applicable exclusion will increase from $5,340,000 in 2014 to $5,430,000 for 2015. Gifts to Noncitizen Spouses. The first $147,000 of gifts made in 2015 to a spouse who is not a U.S. citizen will not be included in taxable gifts, up $2,000 from $145,000 in 2014. Foreign Earned Income/Housing. The amount of the 2015 foreign earned income exclusion under Code Sec. 911 will be $100,800, up from $99,200 for 2014. The maximum foreign earned income housing deduction for 2015 will be $30,240, up from $29,760 for 2014. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.Close

Contact Information

Phone:  815-455-9462

Email:  nancygonsiorek@comcast.net

Address:  3720 Buckhorn Drive, Crystal Lake, IL  60012

© 2014 Nancy L. Gonsiorek CPA LLC