Friday, September 24, 2010

Long Awaited Cell Phone Relief

The Small Business Jobs Act of 2010 has passed through Congress and is on its way to the President's desk for signature. While the majority of the bill is directed at for profit businesses, there is a provision that will bring great relief to nonprofits as well as for profit businesses. The bill contains the long awaited relief for the onerous rules regarding employer provided cell phones. Under the old law, cell phones were treated as "listed property". This classification required the extensive documentation of who, when, and why of each call in order to substantiate the business purpose of the call and the related business use of the phone. This classification was created at the time when cell phones were rather large and sat in our cars and not in our pockets. The phones and the calling plans were very expensive. The recent advances in technology have created a totally different animal. Between cheap phones, flat rate plans and data services, the substantiation requirements of "listed property" became a burden too great to bear. In recent years, employers have either gone to not paying for the phones at all or including the entire expense for the phone in an employee's taxable income. In response to requests from the Treasury Department, Congress has "delisted" cell phones. This places them under the general rules for proving up business expenses. This doesn't mean that cell phones can become a free for all benefit. There are still other issues that have to be addressed by employers. The employers have to carefully consider providing cell phones to employees due to the inherent personal use of the phones. Working Condition Fringe Benefit: Employers can provide the cell phones as "working condition fringe benefits". However, in order to meet this test, the phone has to still be used in a business fashion that would allow the employee to deduct the expense, if the employee paid it personally. Therefore, the phone has to have a significant business purpose. Only the business portion can be excluded from the employee's income. However, now that the phone is not "listed property", it may be easier to determine a reasonable amount that can be considered as business use without the requirement of documenting every single phone call. De Minimis Fringe Benefit: Employers may determine that the amount of personal use of the phone is so small that accounting for it is unreasonable or administratively impracticle. In this case, the employer will make the case that the personal use is a "de minimis fringe benefit" that does not have to be valued for inclusion in the employee's personal income. The result is that employers have to take an honest look at their cell phone policies and determine if the personal use is so small that it can be considered as de minimis or that the personal portion is such that the employer will decide to consider a portion of the phone as personal and either have the employee pay for that portion or include that portion of the cell phone bills as a taxable fringe benefit on the employee's Form W-2. In any case, we no longer have to demand who, when, and why of every call in order to make the decision. Warning: Do not consider this change the liberty to provide employees with cell phones on a tax free basis without any thought or consideration to the business use of the phone. Employers should clearly document why they believe the cell phone is a business related expense and be prepared to support any challenge from the IRS as to the provision of a cell phone as a tax free fringe benefit.

Thursday, August 5, 2010

Relief For Small Organizations Facing Revocation

The Pension Protection Act in 2006 enacted laws that require the IRS to revoke the tax exempt status of any organization that is required to file Form 990, but fails to do so for three consecutive years. (This is only effective for organizations that have a Form 990 filing requirement. It does not effect churches.) The first set of revocations was to be effective on May 17, 2010. However, the IRS became concerned that too many organizations did not fully understand the ramifications of not filing, and it created a leniency program.

If an organization has received a determination letter indicating it has a Form 990 filing requirement, then it must file either Form 990, Form 990-EZ or Form 990-N for each year of its existence. The IRS has granted an extension until October 15, 2010 for organizations to file one of these forms for each of the past three years or at least for 2009 for those eligible to file Form 990-N. This action will avoid revocation of the organization's exempt status.

If an organization does not qualify to file Form 990-N, and it should have filed Forms 990/990-EZ for each of the last three years, the IRS has created a voluntary compliance program. The organization must file returns for all three outstanding years and pay a compliance fee. The maximum compliance fee is $500 and the program relieves an organization from the assessment of penalties for late filing of the returns. This represents a savings of thousands of dollars since the late filing penalty is $20 per day for small organizations and $100 per day for larger organizations.

It is advisable that all organizations determine if they are in compliance with their filing requirements. The IRS has published a listing of organizations with planned revocation on its website. The lists are separated by state. If you have question regarding an organization, the lists may be reviewed to determine if the organization is scheduled for revocation.

With all of the extra effort expended by the IRS, it is anticipated the the revocations will be issued later this year. Additionally, if an organization has a return that has not been filed, it should pursue the voluntary compliance program as a remedy. If only one return is late, it should be filed through this program. After the end of this program, the IRS will probably be fairly unforgiving to late filers.

Monday, August 2, 2010

Form 1099-Misc Reporting Nightmare

Perhaps you have heard the ugly rumors of the increased mandatory reporting for payments to vendors. Unfortunately, it isn't all rumor, but it is truth. In an effort to make the health care bill "deficit neutral", the legislation included a provision that would require Forms 1099-Misc to be filed for virtually all vendor payments, including those to corporations, that exceed $600 for the year. It seems that this provision alone is anticipated to raise $17 billion of the nearly $1 trillion needed for the health care legislation. While this looked good on paper, no one attempted to consider the logistics or the cost to comply with such legislation. For example, what would be the cost to businesses to comply or better yet, could the IRS handle all of those Forms 1099-Misc. It is estimated that the provision will increase the filings by five fold. The provision is set to become effective in 2012. However, help may be on the horizon. It seems that both Democrats and Republicans are realizing this is not the best idea and something may have to be done. Rep. Dave Camp of Michigan has introduced H.R. 5893 to repeal this provision citing information that the compliance with the provision will cost American businesses more than the amount of revenue generated for the government. The cost is anticipated to be extremely burdensome to small business and small organizations. This translates into money diverted to regulatory compliance that a nonprofit should be able to use to fund its programs. At this point, we are watching Congress to see what will happen. We don't have to begin gearing up for the reporting just at this time, and have some time for Congress to save the day. Stay tuned to the final outcome on this issue and more guidance on when, or if, you will need to send a Form W-9 to Office Depot to gain their address and employer identification number.

Monday, April 26, 2010

Payroll Tax Responsibilities - A Gentle Reminder

A recent Tax Court memo decision serves as a good reminder that an organization is ultimately responsible for payroll tax deposits and filings even if the duties are delegated to an outside provider. In McNair Eye Center, Inc. v. Commissioner, TC Memo 2010-81, the owner of the eye center was held to be ultimately responsible for the timely deposit of payroll taxes despite the fact he hired an outside CPA to take on those responsibilities. The CPA filed the 2005 Forms 941 in February of 2006 and failed to pay the 2005 payroll taxes. The IRS determined, and the Court agreed, that the ultimate responsibility for the payment of the payroll taxes was the owner of the eye center. Therefore, there was not a reasonable cause to abate the penalties related to the late payment of the payroll taxes and the late filing of Forms 941.

While this case involves a for profit entity, the rules are the same for nonprofit organizations. Organizations should take seriously all responsibilities surrounding payroll. The ultimate responsibility for the payment of the payroll taxes is often attributed to the board of directors of the nonprofit or the officers of the nonprofit. This is true even if the organization has hired someone to handle all of the payroll functions of the organization and even if the organization uses an outside payroll service to process its payroll.

Not only are the related penalties a concern for an organization, but anyone deemed to be a "responsible person" can be held personally liable for unpaid payroll taxes. Therefore, it is in everyone's best interest to institute procedures to confirm the organization's compliance in regards to its payroll tax deposits and its payroll tax filings.

Thursday, April 22, 2010

New Resource For Nonprofits

Thomson Reuters/PPC has just published a brand new guide for nonprofits entitled Nonprofit Tax and Governance Guide: Helping Organizations Comply. Unlike other PPC materials that are published for the professional practitioner, this guide is published specifically for the nonprofit organization, its board members, and its staff. It covers various areas of governance, fundraising, compensation, and contributions. My husband, Frank Sommerville, and I were honored with the opportunity to assist in the writing of this new resource, so we are especially excited about its publication. The guide is full of helpful information as well as examples of policies, procedures, and other practical tools to assist you in operating a nonprofit organization. Any organization interested in more information about the publication can contact PPC at 1-800-431-9025.

Monday, March 22, 2010

HIRE Act of 2010 - The Tax Man Giveth

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act better known as the HIRE Act of 2010. (Do you wonder how many people it took, or how long it took them, to come up with the name for this legislation that would create the acronym HIRE?) This act relieves employers from paying the social security portion or OASDI portion of the employment taxes on wages paid during 2010 to qualified workers.

CAUTION: There is no relief from the employer portion of Medicare taxes or any of the taxes that are withheld from the employee.

The OASDI portion of the employment tax is the 6.2% of the FICA taxes assessed on wages up to $106,800 during 2010. The maximum OASDI tax an employer must pay on any worker is $6,621.60. In essence, an employer will not have to pay this tax on wages paid between March 19, 2010 and December 31, 2010 to a qualified worker.

A qualified worker is one that is:

  • Employed after February 3, 2010;
  • Provides a signed affidavit that he has not been employed for more than 40 hours during the past 60 days;
  • Isn't employed to replace another employee unless the other employee separated from employment either voluntarily or for cause (i.e., you can't fire the entire staff and then hire new ones simply to benefit from this new law); and
  • Isn't related to the employer.

The tax relief that is attributable to the first quarter of 2010 will not be refunded, but will be applied to pay other payroll taxes that are due for the second quarter. After that, the employer will simply not have to remit the taxes. (This gives the IRS enough time to draft the new Form 941. There simply isn't time before Form 941 is due for the first quarter of 2010.)

Wednesday, March 17, 2010

Lack of Required Statement Kills Charitable Contribution

Friedman, TC Memo 2010-45
In a recent Tax Court decision, a taxpayer forfeited his charitable contribution for several reasons but one of the reasons was due to an insufficient charitable contribution receipt. The receipt issued to the taxpayer failed to contain the statement that there were no goods or services provided to the donor in exchange for the contribution.

In 1995 Congress enacted IRC Section 170(f)(8)requiring a donor to obtain a qualifying charitable contribution receipt to claim a deduction for a contribution of $250 or more. A qualifying receipt must meet the following criteria:

1. The receipt must contain the amount of cash or a description of the property contributed.
2. The receipt must state whether or not the donee organization provided any goods or services in consideration, in whole or in part, for the contribution.
3. The receipt must contain a description and a good faith estimate of the value of any goods or services referred to in (2) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
4. The receipt must be addressed to the donor and obtained by the donor by the earlier of the date the donor files his tax return or the due date of the return (including extensions).

Additionally, legislation in 2006 added to the above requirements the need for the receipt to reflect the dates of the donations as well as the individual amounts of the donations.

Despite the fact that these changes in the law originated in 1995, an amazing number of charitable organizations still do not issue receipts with the wording required to make the receipt a qualifying receipt. Granted the law is not on the organization, but rather it is on the donor to have a qualifying receipt in order to claim a donation. However, donors believe that the receipts received from charitable and religious organizations will be qualifying receipts. Many discover in the course of an IRS exam that the receipt received from an organization is not qualifying and lose the corresponding deduction. There is nothing at this point that can be done for a donor. The donation is lost and the receipt cannot be corrected. At this point, an organization may lose a valuable relationship.

Despite being the law for 15 years, many organizations, including many religious organizations, are issuing receipts to their donors that are insufficient to claim a donation. Each year as my firm prepares tax returns for individuals, we see receipts that are insufficient to claim a donation and must be reissued prior to the completion of the return. Additionally, I have received calls from distraught church finance and business administrators wanting to know how to provide assistance to the member who has lost the deduction due to an insufficient receipt.

In order to make sure that an organization is not the one in the hot seat dealing with a distraught and angry donor, it should review all the contribution receipts for your organization and make sure the following wording appears on the receipt.

There were no goods or services given in exchange for the above contributions other than intangible religious benefits.

In the event the receipt does include the fair market value of the goods or services received, the the organization may include this statement:

There were no goods or services given in exchange for the above contributions other than intangible religious benefits and those goods or services so indicated on this receipt.

Tuesday, January 26, 2010

Haiti Earthquake Relief Contributions Deductible in 2009

On January 22nd, President Obama signed into law H.R. 4462, which allows taxpayers to claim a charitable contribution on their 2009 tax return for cash contributions given through March 1, 2010, dedicated to Haiti earthquake relief. The law does not extend to the donation of noncash items dedicated to relief efforts. The contributions may be deductible either on the 2009 tax return or on the taxpayer's 2010 tax return.

This new law will require charitable organizations to clearly indicate on donor receipts the contributions received for Haiti relief efforts. Additionally, the contributions for Haiti relief efforts will need to be separately stated on any cumulative or year end receipts issued at the close of 2010.

As a reminder, all contributions of $250 or more are required to be documented with a qualifying receipt including the following:
  • the date the receipt is issued
  • the name and address of the donor
  • a listing of the charitable contributions
  • a statement indicating that no goods or services were given in exchange for the contribuitons