Starting a Tax-Exempt Organization

Starting a tax-exempt organization is a multi-step process.  With more than 30 different types of tax-exempt organizations defined in the tax code, it is no wonder that it can be both daunting and confusing. In order to help you navigate the system, this article will walk you through each step.

The first step is to form the organization under state law as a corporation, a trust or an unincorporated association.  The organization must have articles of organization that specifically limit the organization to one or more exempt purposes and stop the organization from participating in activities that do not further one or more of the exempt purposes, unless those activities are insubstantial.  The organization should also generate by-laws which dictate what it can and cannot do.  While by-laws are not required under federal tax law, state laws may require nonprofit organizations to have them.

The next order of business is to obtain a federal identification number for the organization. You can apply for one on the IRS’s website or by filing Form SS-4.

You will then need to request tax-exempt status from the IRS.  You can apply under code section 501(c)(3) using Form 1023 or under code section 501(a) using Form 1024.  About half of all nonprofit organizations are formed under section 501(c)(3).  The applications are extensive and require information detailing the purposes and activities of the organization, budgets, board of directors, etc. The IRS has issued publications to assist charities in applying for tax-exempt status.  You can review IRS Publication 4220, “Applying for 501(c)(3) Tax-Exempt Status,” and Publication 557, “Tax-Exempt Status for Your Organization,” for additional information.  Many organizations utilize an attorney or accountant to assist in completing the applications.

After you have sent in your application with the required fees, you will receive a determination letter from the IRS.  This letter will indicate whether the IRS will recognize or reject your organization’s exempt status. If you are denied a tax exemption, you can go to an IRS Appeals Office within 30 days of the determination to discuss the matter with an IRS appeals agent.

There are a few organizations which do not need to file Form 1023 or 1024.  They are churches and related organizations, organizations that are not private foundations and have gross receipts up to $5,000, and chapters of organizations controlled by national or central bodies that already have exempt status.

Tax-exempt organizations are required to file Form 990 each year.  There are also annual informational forms required by most states.  We will explore the annual filings in detail in an upcoming article.  Stay tuned!

If you have any questions about this article or any other matter, please contact our office at (714) 836-8300.

Watch House Hearing on Organizations Targeted by the IRS

Today the House Oversight committee is holding hearings about the IRS targeting of exempt organizations with specific political ideology.  You can watch the hearings at this link here.

 

Charitable Deduction Substantiation Requirements

Recently, the United States Tax Court denied charitable contributions in full in two different cases.  The donations were denied for failure to obtain proper substantiation in a timely manner.  The IRS has provided a list of the substantiation and documentation required for various contributions.  These rules apply to individuals making qualified contributions to IRC §501(c)(3) organizations.  Additional rules apply when gifting a partial or restricted interest, gifts via trusts, and gifts with remainder interest.

We have included a schedule prepared by Spidell Publishing, Inc. for your easy reference:

Amount	Documentation	Substantiation
Cash donations of less than $250	Bank record	Includes canceled check; bank, credit union or credit card statement showing name; and transaction posting date (credit card)
	Written communication from charity	Name of charity, date and amount of contribution
	Payroll deduction	Pledge card and pay stub, W-2 wage statement, or other document furnished by employer, including total amount withheld for charity
Cash donations of $250 or more	Written acknowledgment from the charity for each donation	Name of charity, date, amount paid, description, and estimate of value of goods or services provided by the charity
Noncash contributions of less than $250	Receipt from donee or reliable records
Property donations greater than $250 and not more than $500	Contemporaneous written acknowledgment	Name of charity, date, amount paid, and description (but not value) of goods or services provided by the charity
Property donations greater than $500 and not more than $5,000	Written acknowledgment	All of the above, plus: (1) how you got the property; (2) date you got the property; and (3) cost or other basis. Must file Form 8283, Noncash Charitable Contributions
Donations of $5,000 or more excluding stock, certain works of art, and autos	Qualified appraisal	Attach appraisal to return and complete page 2 of Form 8283
Donations of art valued at $20,000 or more	Signed appraisal and photograph	Attach signed appraisal to return and provide photograph of sufficient quality and size to fully show object if requested by the IRS
Stock of publicly traded corporation	No appraisal required if as of date of the contribution market quotations are readily available on an established securities market	Attach Form 8283 to return
Nonpublicly traded stock	Contributions greater than $5,000 and less than or equal to $10,000	A partially completed appraisal summary; complete Form 8283, Part I
	Contributions greater than $10,000	Attach qualified appraisal to return
Vehicle, boat and airplane with value of more than $500	Value is the lesser of the gross sales proceeds or the FMV of the vehicle if no “significant use or material improvement”	Taxpayer needs contemporaneous written acknowledgment  from donee organization; donee organization must use Form 1098-C to report value of vehicle donations, if vehicle is sold; this can be used to provide acknowledgment to the donor

If you have any questions or require further information, please contact our office at (714) 836-8300.

Anaheim Enterprise Zone Credits

 

On February 1, 2012, the State of California designated the City of Anaheim as eligible to receive Enterprise Zone Credits.

These credits provide tax incentives to businesses that are located in the specified Enterprise Zones.  There are currently 42  zones located in the State of California.  This program was established in 1984 to stimulate the economy in several depressed areas.

Anaheim will receive the designation for 15 years (through January 31, 2027).

There are several ways to receive the tax incentives.

1. Hiring Tax Credits – Businesses located within the Enterprise Zone that hire qualified individuals can earn up to $37,440 in state credits for each qualified employee hired.  These credits can be used to directly offset state income tax and can be carried over until used up.

2.  Sales Tax Credit – Companies can earn sales tax credits on the purchase of machinery and equipment.  The business will receive a state tax credit equal to the sales or use tax paid on up to $20 million per year of equipment purchased.

3. Interest Deduction – Lenders that loan money to businesses located in the Enterprise Zone are not taxed on the net interest income earned on the loan.  This can save of thousands of dollars in tax each year.

To find out if your business is located in the Anaheim Enterprise Zone, please click the following link.

www.anaheimchamber.org/anaheimez/boundaries.asp

If you would like more information about Enterprise Zone credits or to find out if your business is located in one of the 42 zones, please contact our office at (714) 836-8300.

Choosing the Right Charities

In this slow economy, we all want our dollar to go further and mean more. This is certainly true when it comes to our charitable giving.  How can we be sure that we are selecting charities that are effectively administered, accountable and fiscally responsible?  Here are a few items to consider when choosing charities to contribute to:

• Verify the organization’s tax-exempt status and ensure the organization is in good standing.  The IRS and the California Attorney General’s office allow you to review this information on their websites.
• Review the most recent financial statements and tax returns for the nonprofit.  The annual reports and forms contain important financial information and also address the various programs and activities the exempt organization engaged in for the year. Also available on the annual returns is the overhead expense ratio measure to confirm how much of each donation is spent on programs as opposed to administrative and fundraising costs.  Keep in mind, however, that low overhead does not automatically mean an organization is effectively accomplishing its mission, nor does it necessarily confirm great organizational efficiency.
• Consider the diversity of the funding sources.  Does the nonprofit receive donations from a variety of sources?  Examples of various funding sources are private donors, program-related loans, program-related investments, and government funding.
• Review the organization’s investment and conflict-of-interest policies. The exempt organization’s annual reports and financial statements often specify who manages the organization’s funds and investments. You can check the investment-manager’s track record through several sources such as http://www.morningstar.com and http://www.institutionalinvestor.com.  If the investment manager(s) sits on the board of directors or is an officer then a conflict-of-interest policy will be important and should be in place.
• Review the nonprofit’s mission statement. Do the programs and services match up with the organization’s mission and your philanthropic agenda?
• Visit the organization and meet the leadership and staff. How experienced are leadership and staff relative to the programs and services they provide? What work do they outsource? Do they have strategic plans for the future? How are they being implemented?  These indicate an organization that is going forward and conscientious of how best to utilize the donations they receive.

In summary, you should contribute to organizations that align with your philanthropic agenda and that are responsible both to the communities they benefit and the individuals who donate.  The suggestions noted above can assist you in selecting which nonprofits you choose to contribute to.

Content for this article was sourced from Journal of Accountancy, February 2012, “Help Clients Choose the Right Charities”.  Please visit http://www.journalofaccountancy.com or contact our office for more information.

Save taxes by donating appreciated assets

 

One of the most effective but sometimes unknown ways to make a charitable donation to a nonprofit organization is by giving appreciated assets such as stocks, real estate or investments. The donation of appreciated assets when properly planned can have a tax benefit to the taxpayer as well as provide a significant and lasting benefit to the charitable organization. This approach also allows a donor to make a meaningful contribution to a charity without necessarily impacting their monthly cash flow.

In order to take advantage of this tax saving strategy, the donor needs to keep in mind the following factors. First, the taxpayer needs to determine that the item being donated is a capital asset. Capital assets are usually personal property (not business property) that if held for over one year would be subject to long term capital gain rates when sold. Examples of capital assets would be stocks, rental properties, bonds, jewelry, coin collections and cars.

Next, the taxpayer needs to donate the investment directly to the charity without selling it first. If the donor sells the investment personally and then donates the money to charity, they will need to report the capital gain on their personal income tax returns and pay the appropriate long term capital gains taxes. This transaction reduces the amount of the charitable deduction available to the donor and also results in less cash contributed to the nonprofit organization.

If the donor adheres to these factors, they are allowed a tax deduction equal to the fair market value of the donated item and will not be subject to any taxation. This fair market value deduction is allowed regardless of the basis (usually the purchase price) in the investment by the taxpayer. The taxpayer’s deduction for a donation to charity can be up to 30% of their adjusted gross income in any given year. Any donation over the 30% limitation can be carried forward and used in the future up to five years.

As individuals start reviewing their year-end tax plans, this strategy can significantly reduce a taxpayer’s income tax liability. But before making a donation you should discuss your specific situation with your tax advisor.

IRS Introduces Online Lookup Tool for Exempt Organizations

The IRS has launched a new online lookup tool called Exempt Organizations Select Check, that allows taxpayers to find out whether an organization is eligible to receive tax-deductible contributions or has had its tax exemption revoked.

You can access the new look up tool here.

How do I start a nonprofit organization–step 1

There are many steps involved in forming a nonprofit organization.  When you started your movement, idea, or ministry, you were excited about the goals you were accomplishing.  Your ministry starts developing and you realize that in order for your organization to grow and reach other individuals, you need to get a more formal entity in place.  You are now ready to take it to the next level.

The first step in forming a 501(c)(3)nonprofit charity organization is to form a nonprofit corporation or LLC.  This corporation will be formed at the state level.  You will need to enlist the assistance of an attorney and he/she will guide you in deciding what type of nonprofit corporation will best suite your organization.  In the State of California you will want to go to the Secretary of State office and search to ensure your business name has not already been used.  The website is http://kepler.sos.ca.gov/.

This website is a great resource in helping you start your entity and to stay in compliance with the state.

There are three categories of California nonprofit  corporations.  You will need to decide if your nonprofit corporation will be organized as a Mutual Benefit, Public Benefit or a Religious corporation.

1. A Religious corporation is one organized to operate a church or structured primarily for religious purposes.
2. A Public Benefit corporation is organized primarily for charitable purposes and plans to obtain state tax exempt status under California Revenue and Tax Code section 23701(d).  This category covers most of your 501(c)(3) organizations, civic leagues or social welfare organizations.
3. A Mutual Benefit corporation is corporation organized other than religious charitable, civic league or social welfare purposes.  These organizations may not be planning tax exempt status at all.

Following you will find a link to download the instructions and sample forms needed to file your Articles of Incorporation. 

www.sos.ca.gov/business/corp/pdf/articles/corp_artsnp.pdf

After filing your articles, you will receive back a stamped copy from the state indicating the approval of your Articles of Incorporation and your new state identification number.

You are now ready to move onto the next step.

As always if we can be of service, please contact steve@ntcpas.com

2012 OC Economic Forecast

On January 24th, Dr. Esmael Adibi presented the 2012 Economic Forecast at the California Society of CPA’s event in Orange County.  Dr. Adibi is the director of the A. Gary Anderson Center for Economic Research at Chapman University. 

His presentation projected a positive but small growth in the economy in 2012 and mild improvements in consumer spending. 

One of the main area’s that Dr. Adibi focused on was job growth.  He indicated that it is taking so much longer for our country to break out of the recession because there is less job creation than at the end of previous recessions.  There have been 11 recessions in the US since World War II and this recession is one of the longest because there are no new jobs to boost the economy.  He mentioned that presidents are irrelevant when it comes to our economic growth but new jobs are the key. 

Dr. Adibi projected mild increases in auto sales and consumer spending in 2012.  One encouraging sign for the US is that Canada and Mexico are both growing.  These countries are the leading export for the US.

Dr. Adibi concluded that consumer’s personal income should rise by 5.4% in 2012 but that the housing market will still remain flat with only a .2% increase in the current year.

IRS–Exempt Organization tool

On Friday, the Internal Revenue Service launched a new online tool called Exempt Organization Select Check.  This new resource is designed to help taxpayers gather more information regarding exempt organizations. 

Individuals can now go to this online part of IRS.gov and search whether or not an entity is eligible to receive tax exempt donations.  The taxpayer can also search and determine if the organization has lost their tax exempt status due to failure to file form 990 or  the IRS postcard for 990N for the past three years.  Finally, the taxpayer is also allowed to view all 990N postcard returns that have been filed by the selected entity.

For more information go to:

http://www.irs.gov/charities/article/0,,id=249767,00.html