tag:blogger.com,1999:blog-11407038989251390392024-03-13T07:27:19.127-07:00Elaine's Tax Tips for NonprofitsOffering helpful tips to nonprofit organizations in areas of federal tax compliance.Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.comBlogger68125tag:blogger.com,1999:blog-1140703898925139039.post-35316799326041644692023-03-20T12:32:00.001-07:002023-03-20T12:32:24.866-07:00<h1 style="text-align: left;"><b>Lose the Paper -</b><b> E-Filing Requirements Increase</b></h1><div><b>Elaine Sommerville, CPA</b></div><div><b> Sandra Fowler, CPA, CPP</b></div>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: arial;">The IRS, helped by Congress, has
been on a continual path of increasing mandated electronic filing of various
returns. Despite their best efforts, in
2019, the IRS still received nearly 40 million paper information returns, even
though approximately 99% of all information returns for that year were e-filed. In
2019 the IRS received another boost to their goal of reducing paper with the Taxpayer
First Act (the Act). The Act changed the
electronic filing requirements for an array of information returns filed by
businesses by lowering the threshold for required electronic filing of certain
forms. Before the Act, electronic filing was required for a return, if the
taxpayer filed as least 250 returns in that series. The Act reduces this
requirement to 10 returns. Immediate implementation of the law was suspended
awaiting the issuance of final regulations by the IRS. <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: arial;">The final regulations issued on
February 21, 2023 are effective for tax years ending on or after December 31,
2023. All taxpayers filing 10 returns or
more in a tax year are now required to file those returns electronically.
Returns include information returns (including Forms 1099-NEC, 1099-Misc and W-2),
corporate income tax returns, withholding tax returns, and excise tax returns and
others. The 10-return filing threshold is an aggregate calculation across all
returns covered by the regulations. For example, a small nonprofit files eight
Forms W-2 for its employees and 2 Forms 1099-NEC for its independent
contractors. Under the new law, all 10
forms must be filed electronically. The
regulation generally applies to returns required to be filed for taxable years ending on
or after December 31, 2023. Therefore, for 2023 forms filed in 2024, electronic
filing will be required for all taxpayers filing 10 or more returns. For many
nonprofit organizations, the most affected filings will be filing Forms W-2 and
Forms 1099-NEC/MISC. The Form 990 series of returns filed by nonprofit
organizations is already under mandated e-filing although the new regulations clearly state that a Form 990 filed via a paper form when e-filing is required is considered to have not been filed.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: arial;">While many organizations already
utilize software facilitating e-filing of returns, smaller organizations may
still file paper returns. Looking forward to facilitating this new requirement,
Congress mandated the IRS create an e-filing system. Meeting this mandate, the IRS rolled out the
Information Return Intake System (IRIS) in January of 2023. Through IRIS, taxpayers can electronically file
any of the Forms 1099 series for tax year 2022
and future years. Taxpayers will need to apply for a Transmitter Control Code
to use this system to electronically file forms. All this information is
available on the IRS website at <a href="https://www.irs.gov/filing/e-file-forms-1099-with-iris">https://www.irs.gov/filing/e-file-forms-1099-with-iris</a>.
The Social Security Administration already maintains a method of e-filing Forms
W-2 and information is available at <a href="https://www.ssa.gov/employer/">https://www.ssa.gov/employer/</a>.
<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: arial;">If the taxpayer believes filing
returns electronically creates an undue hardship to the taxpayer, a waiver can
be requested by filing Form 8508, <i>Request for Waiver from Electronical
Filing of Information Returns </i>at least 45 days before the due date of the
return(s) for which you are requesting a waiver. The instructions require
substantiation be provided for a taxpayer’s justification for the waiver
request and acceptance is not automatic. A waiver should only be requested when
necessary.<o:p></o:p></span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: arial;">Practically, it is best to avoid filing any return or report with the IRS or the Social security Administration using paper. Both entities are struggling to timely process paper filings, so practitioners encourage clients to utilize electronic filing and payment avenues. The shutdowns experienced during the pandemic created a severe backlog for the IRS, and it is just now catching up on processing manually filed returns. By filing electronically, the taxpayer can ensure filings are received and processed by the IRS timely and avoid errors made during the manual input of information received by the IRS. Electronic filing platforms provide confirmation information allowing for a tracking of the filing if technical issues occur. Not to mention the time saved in preparing the mailing of paper returns requiring certified return receipt cards and trips to the post office. The new IRIS system is not the only e-filing option available to taxpayers for the Form 1099 series of information returns. And the Social Security Administration is not the only avenue for e-filing Forms W2. Many accounting software platforms include e-filing options, all tax practitioners maintain e-filing options and there are independent companies easily available to taxpayers offering these services through browser-based platforms. The key to meeting this new mandate is preparing for the January 2024 filing season by selecting the e-file options best available to the taxpayer before the filing season begins. </span></p>
<span style="line-height: 107%;"><p style="text-align: justify;"><br /></p></span>Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-91611527232502314402020-06-08T11:24:00.001-07:002020-06-08T11:32:45.623-07:00COVID-19 Update #11 - The PPP Loan Game Changer<br />
<div class="MsoNormal">
The past two months have seen a flurry of
activity as professionals and regulatory agencies interpreted all the aspects
of the legislation passed to address various issues associated with the corona
virus.<span style="mso-spacerun: yes;"> </span>The blog has not attempted to
address all the changes as we have waited to find some final settling of the ever-moving
target of final implementation of the new rules.<span style="mso-spacerun: yes;"> </span>One of the difficult areas has been the
administration of the loans issued through the Paycheck Protection
Program.<span style="mso-spacerun: yes;"> </span>Much has been written and many
webinars have been conducted to take apart and put back together all the
nuances with this program.<span style="mso-spacerun: yes;"> </span>This program
has been the most public of the assistance programs.<span style="mso-spacerun: yes;"> </span>From obtaining the loans, to keeping the
loans (or maybe returning them), and now to the forgiveness aspects of the
loan, administering these loans has been challenging.<span style="mso-spacerun: yes;"> </span>With confusion shrouding the program,
Congress enacted changes to assist in making the program more beneficial to
recipients.<span style="mso-spacerun: yes;"> </span>The Paycheck Protection
Program Flexibility Act of 2020 was signed by President Trump on June 5th bringing
some much-needed flexibility to the PPP.<o:p></o:p></div>
<h4>
Background</h4>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
The PPP was originally authorized by the CARES, Act.<span style="mso-spacerun: yes;"> </span>With initial funding quickly disbursed,
additional funding was provided by Congress.<span style="mso-spacerun: yes;">
</span>(Funding is still available, if your organization needs
assistance.)<span style="mso-spacerun: yes;"> </span>Most organizations have
moved past obtaining the loans, and justifying the loans, and are now
addressing the next step; applying for the loan forgiveness.<span style="mso-spacerun: yes;"> </span>While there are various requirements, for
most recipients, the funds available for forgiveness were originally required to
be spent in the eight weeks following the funding of the loan.<span style="mso-spacerun: yes;"> </span>Consternation set in as recipients realized
they could not spend the funds in the requisite eight weeks due to a multitude
of factors.<span style="mso-spacerun: yes;"> </span>Significantly, the ongoing
restrictions on business’s operations revealed problems with the PPP as
originally implemented.<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<h4>
Paycheck Protection Program Flexibility Act of 2020</h4>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
Enacted to address several growing concerns with
implementing the original legislation, the extension act provides for greater
flexibility in gaining forgiveness of the loan funds.<span style="mso-spacerun: yes;"> </span>The PPP Flexibility Act makes these changes: <o:p></o:p></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
</div>
<ul>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]-->Extension of time to use the funds – Originally,
set at eight weeks, the time to use the funds has now been extended by changing
the definition of the term “covered period” to the earlier of twenty-four weeks
from the loan funding or December 31, 2020.<span style="mso-spacerun: yes;">
</span>This provision triples the period to assist organizations that may have
been closed or restricted in operations during the first weeks after receiving
the funds.<span style="mso-spacerun: yes;"> </span>Recipients may still elect
the eight-week period, if this time-period better suits operations. </li>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]-->Establishes a set allocation usage of funds – Forgiveness may occur when the funds are used in the “covered period”
for payroll costs and certain overhead costs.<span style="mso-spacerun: yes;">
</span>While original legislation did not determine a percentage between the
two areas, the SBA had announced that at least 75% of the funds had to be used
on payroll costs.<span style="mso-spacerun: yes;"> </span>The legislation establishes an allowable 60/40 split on the fund’s usage.<span style="mso-spacerun: yes;"> </span>This provision accomplishes the goal of
clearly stating that no <span style="color: black;">more than 40% </span>of the
funds can be used on the overhead items, i.e., rent, utilities, transportation,
mortgage interest.<span style="mso-spacerun: yes;"> </span>(The legislation also
indicates that 60% of the funds <b>must</b> be spent on payroll costs or none of the
funds are forgiven.<span style="mso-spacerun: yes;"> </span>However, some
commentators believe this is a drafting error and will be corrected to allow
for partial forgiveness.)</li>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]-->Workforce reestablishment – The original program
required a return to “normal” of the number of full-time equivalent employees employed
at February 15<sup>th</sup> by June 30th.<span style="mso-spacerun: yes;">
</span>With extended closures and other operational limitations, the June 30<sup>th</sup>
deadline has now been moved to December 31, 2020.<span style="mso-spacerun: yes;"> </span>And some considerations are provided for this requirement if reemployment
is restricted or limited due to ongoing government guidance and
restrictions.<span style="mso-spacerun: yes;"> </span></li>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]-->Extension of repayment period – While the loans
were originally granted with a two-year repayment arrangement, the period has
been legislatively established at five years for any portion of the loan that
cannot be forgiven.</li>
<li><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]-->Delay in employer tax deposits – A provision of
the CARES, Act allows employers to delay depositing or paying the employer
portion of the Social Security and Medicare taxes.<span style="mso-spacerun: yes;"> </span>Originally prohibited from taking advantage
of this relief provision, PPP recipients may now delay depositing the employer-portion of
these taxes.<span style="mso-spacerun: yes;"> </span>See this blog’s post for
COVID-19 Update #9 published in April. <span style="mso-spacerun: yes;"> </span></li>
</ul>
<h4>
Time to Apply</h4>
<div>
As many approached the conclusion of the initial eight-week "covered period", plans commenced to complete the application requesting loan forgiveness. The SBA's original loan forgiveness application was not for the faint of heart. With the legislative changes, the SBA should issue a new loan forgiveness application. Professional assistance may be required to complete the application. Forgiveness must be requested within ten months of the end of the recipient's "covered period". For most recipients, this will be ten month following the twenty-four-week period after the loan's funding. However, some organization may elect the eight-week covered period after reviewing various business considerations. </div>
<div>
<br /></div>
<h4>
Summary</h4>
<div>
Navigating the PPP process has been challenging since its inception, but the funds have provided significant financial resources to many nonprofit organizations and churches. To successfully navigate this final phase of the program, recipients will want to monitor upcoming guidance from the SBA and may need to consult with their outside professionals to gain maximum benefit from the program. For those organization determining they could not spend all of the money prior to the end of eight weeks, the new legislation provides a sigh of relief during these turbulent times.<br />
<ul>
</ul>
<h4 style="margin-left: .25in;">
</h4>
<br /></div>
Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-83411156444580503702020-05-14T06:23:00.000-07:002020-05-14T06:23:56.883-07:00Proposed New Guidance for Group Rulings Indicates Future Changes for All GroupsProposing sweeping reform and updating archaic guidance for organization's holding group rulings, the IRS issued Notice 2020-36 proposing changes in the rules applicable to group rulings. The guidance is issued in advance of a final revenue procedure that may be issued on the topic later this year. <br />
<br />
Not updated since 1980, guidance for organizations hosting a group ruling has been outdated for many years. The new proposed guidance promises to be an all inclusive "how to" as it applies to central organizations hosting group rulings. Group rulings are common in every area of exempt organizations but have not received great attention over the years. Several years ago, the IRS performed a compliance initiative directed at group rulings. While no formal report was issued, the proposed guidance more than like addresses concerns raised through the initiative. Virtually all groups will be affected by the proposed guidance including church denominational group rulings.<br />
<br />
Group rulings consist of a central organization (Central) that obtain its own exemption and then obtain special permission from the IRS to share its exemption with subordinate organizations (Subordinate). Many well known organizations operate with group rulings including professional membership organizations, parent-teacher organizations, student/alumni groups and youth organizations.<br />
<h4>
Changing the Qualifications</h4>
A central organization has been able to obtain a group ruling determination as long as it has at least 1 subordinate organization. The proposed guidance requires a new group have 5 members for the central organization to qualify for the group ruling. Additionally, a group must always have at least one subordinate member to maintain the group.<br />
<br />
A central organization will only be allowed to have one group exemption ruling. <br />
<br />
Preexisting groups will be required to comply with the above two provisions within one year after the final revenue procedure is published in the Internal Revenue Bulletin.<br />
<h4>
Strengthening Oversight</h4>
The IRS has long been frustrated by the lack of oversight provided by central organizations to subordinates. Addressing this lack of oversight, the new guidance defines required oversight functions. Central must either exercise "general supervision" or "control" over its subordinates. <br />
<ul>
<li>The Central must exercise general supervision by:</li>
<ul>
<li>Annually, obtaining, reviewing and retaining information on Subordinates' finances, activities and compliance with annual filing requirements. In other words, Central is obtaining proof that each subordinate required to file Form 990 is filing the appropriate return as well as obtaining other operational information. </li>
<li>Central will actively educate Subordinates on the Form 990 filing requirements in writing. This requirement addresses the consistent issue with Subordinates losing tax exempt status due to the auto revocation requirements. </li>
</ul>
<li>Control - Control is accomplished when Central appoints the majority of Subordinate's officers, directors or trustees; or a majority of Subordinate's officers, directors or trustees are officers, directors or trustees of Central. </li>
</ul>
<h4>
New Inclusion Requirements</h4>
<div>
Tightening the requirements for who may be included in the group ruling, the new guidance restricts inclusion to: </div>
<div>
<ul>
<li>Central and all subordinates must be exempt under the same 501(c) section. For example, if Central is a 501(c)(4), then all the subordinates must be classified under 501(c)(4). </li>
<li>Further restrictions for 501(c)(3) organizations require all subordinates to be classified as public charities under the same 509(a) classification, but it is not necessary that they all be classified under the same 170(b)(1)(A) classification. For example, a church's denominational ruling may cover schools, churches and hospitals. All of these are classified under 170(b)(1)(A) under different subsections. Subordinates may be publicly supported under 509(a)(1) and 170(b)(1)(A)(vi) interchangeably with a public charity classification under 509(a)(2) and still maintain membership in the group. However, it does not appear that organizations classified under 509(a)(3), supporting organizations, could be included in a ruling unless it solely consists of 509(a)(3) supporting organizations. Additionally, Type III supporting organization are banned from inclusion in any group rulings. </li>
<li>For groups outside the 501(c)(3) arena, all subordinates must also share a the same primary purpose and the same NTEE classification code. </li>
<li>All subordinates must adopt a uniform governing document. Providing a "suggested" document is not sufficient. If a 501(c)(3) group contains differing organizations; i.e., churches, schools, hospitals, a uniform document must be adopted for each group. Subordinates do not have to be corporations, but they must have a governing document. (Note: Due to varying state requirements, it will be interesting to see the final format of this particular requirement.)</li>
</ul>
<h4>
Effective Dates </h4>
</div>
<div>
Except for the items discussed under "Changing the Qualifications" above, the new rules are generally effective when the final revenue procedure is published. For new subordinates, the effective date is immediate upon the publication of the revenue procedure. While other transition relief is granted for preexisting subordinates for some of the rules allowing them to continue in the group, the application of the new rules to all new subordinates may restrict who may join the group. Additionally, there does not appear to be a proposed transition for applying the new oversight rules. </div>
<h4>
Summary</h4>
<div>
Long over due, it is time for all groups to reexamine the way they operate. Some groups will have to restructure due to the matching requirements. While the old rules still apply, groups are best served by transitioning to the proposed new rules. Starting June 17, 2020, the IRS will no longer accept any requests for group rulings until after the publication of the final revenue procedure. Comments on the proposed new rules may be submitted to the IRS until August 16, 2020. Due to the potential restructuring involved to institute some of the new guidance, the IRS should expect a lot of comments between now and August 16th. </div>
<div>
<br /></div>
<div>
<br /></div>
Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-36099277316381601552020-04-24T16:11:00.000-07:002020-04-24T16:11:07.952-07:00COVID-19 Update #10 - The Housing Allowance and the PPPOver the past two weeks many churches have applied for the a loan through the Paycheck Protection Program (PPP). In determining average monthly wages, the banks consistently excluded compensation designated as housing allowance paid to ministers. The housing allowance is not a taxable part of compensation, so it is not reported on a church's payroll reports or on a minister's Form W-2. Since the banks were using these documents to support the payroll amounts, many refused to include the housing allowance. Since the housing allowance may be a significant portion of a minister's cash compensation, omitting it from the calculation of average monthly compensation significantly reduced a church's qualifying amount for the PPP. <br />
<h4>
SBA Clarifies the Issue of Housing Allowance</h4>
The SBA has been updating its frequently asked questions (FAQs) on a regular basis. Today's addition to the FAQs specifically addresses the question of housing allowance. Question 32 now specifically states that payroll costs include all cash compensation. Therefore, the cash housing allowance paid to a minister may be included in a church's payroll costs for the PPP. <br />
<h4>
What Does This Mean</h4>
This clarification has two applications:<br />
<br />
<u>Churches Already With A PPP:</u> Churches who have already received or been approved to receive a PPP loan cannot go back and request more funds. However, the inclusion of the housing allowance as a payroll cost will make it easier to meet the expenditure tests that must be met to justify the use of the funds for the upcoming "forgiveness" phase of the program. Compliance with this phase of the PPP is intricate, so professional assistance may be required. Additionally, we are still waiting on further guidance regarding various aspects of the "forgiveness" phase.<br />
<br />
<u>Churches Applying For A PPP:</u> Starting Monday April 27, 2020, the PPP will be accepting more applications (new funding was approved on Friday April 24, 2020). For churches and religious nonprofits applying in the new phase of funding, the average monthly payroll costs may be calculated including the housing allowance. Lenders may not be fully aware of the intricacies of housing allowance and how it operates. Therefore, churches should be ready to assist in educating lenders in these unique payroll aspects of ministers' compensation.<br />
<br />
<br />
<br />
<br />
<br />Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-76644016956717911552020-04-14T08:36:00.002-07:002020-04-14T08:37:16.381-07:00COVID-19 Update #9 - Deferral of Tax DepositsThe CARES Act provides for employers and self-employed individuals to shift the timing of certain tax payments over the next few months in the hopes of alleviating some of the financial burden felt at this time. Of the CARES Act's programs, this one should be approached with the greatest amount of care, concern and planning.<br />
<h4>
What is Available for Deferral</h4>
The Act allows employers to defer the deposit of the employer's share of Social Security taxes owed on employees' wages as determined by IRC Section 3111(a). This is the OASDI portion of the taxes and is 6.2% of the first $137,700 of taxable wages. The Act does not provide for the deferral of the employer's share of the Medicare taxes associated with employees' wages.<br />
<br />
For the self-employed individual, a deferral of 50% of the tax determined under IRC Section 1402(a) is available. This is the portion of the self-employment tax associated with the Social Security tax as calculated on Schedule SE. Of the 15.3% of self-employment tax calculated, 12.4% is assessed as the Social Security tax.<br />
<br />
The deferral of the applicable taxes is for taxes required to be paid or deposited during the period March 27, 2020 to December 31, 2020. The deferral is not associated with the date the wages were paid, but rather when the taxes are required to be deposited or paid.<br />
<h4>
Provision for the Deferral</h4>
<div>
The tax available for the deferral will be due as follows: </div>
<div>
<ul>
<li>50% due by December 31, 2021 and </li>
<li>50% due by December 31, 2022.</li>
</ul>
<div>
Late payment penalties or interest will not be charged on the taxes deferred through the program because the payments are considered as timely made as long as the above schedule is followed. Of course, the deferred taxes may be paid at any time within this time schedule. </div>
<div>
<br /></div>
<div>
<b><u>Example for the Employer</u> </b></div>
</div>
<div>
<br /></div>
<div>
First Church pays wages to employees other than their ministers totaling $4,000 in April. Normally First Church is a monthly payroll tax depositor, so its April tax deposit is due by May 15th. When reviewing the tax deposit for April, First Church determines it consists of the following: </div>
<div>
<br /></div>
<div>
Federal Income Tax Withholding $ 750</div>
<div>
Social Security Tax Withholding $ 248</div>
<div>
Medicare Tax Withholding $ 58</div>
<div>
Total Employee Withholding $1,056</div>
<div>
<br /></div>
<div>
Social Security Tax - Employer $248</div>
<div>
Medicare Tax - Employer $ 58</div>
<div>
<br /></div>
<div>
Total Potential Tax Deposit $1,362</div>
<div>
<br /></div>
<div>
First Church may defer the $248 of employer Social Security taxes. The tax deposit required at May 15th is $1,114 ($1,362 - $248). The $248 is now due as follows: $124 by December 31, 2021 and the remaining $124 by December 31, 2022. </div>
<div>
<br /></div>
<div>
<i><b>Warning: It is important to note there is no deferral of any of the taxes withheld from the employee. This money doesn't belong to the employer. There is never any reason to not timely remit employee withholdings. These funds are called "trust funds". If not remitted timely, penalties may be assessed against individuals with financial authority within an organization. </b></i></div>
<div>
<i><b><br /></b></i></div>
<div>
<b><u>Example for the Self-Employed Individual</u></b></div>
<div>
<b><u><br /></u></b></div>
<div>
Pastor Joe is the senior pastor of First Church. As a minister, he reports his wages on Schedule SE. His estimated self-employment taxable income for 2020 is $50,000. His estimated self-employment tax is $7,650 consisting of $6,200 Social Security tax and $1,450 of Medicare tax. Pastor Joe decides to make use of the deferral program for 2020. He may defer 50% of the $6,200, or $3,100, to be paid at a later date. This deferral amount can be immediately used to reduce his 2020 estimated tax payments. The deferral is due in two payments: $1,550 must be paid by 12/31/2021 and the other $1,550 must be paid by 12/31/2022. </div>
<h4>
The Deferral and the Paycheck Protection Program</h4>
<div>
All employers may use the deferral program, including those claiming credits for the paid sick or family leave programs provided for in the Families First Coronavirus Relief Act and the employee retention credits provided by the CARES Act. However, employers participating in the Paycheck Protection Program (PPP) are limited in their use of the deferral program. The employer receiving a PPP loan may participate in the deferral program <u>until it has its PPP loan forgiven</u>. At the date the PPP loan is forgiven, the employer may no longer defer any taxes using the deferral program. For the time period the PPP loan is outstanding, the deferral is available. </div>
<h4>
Caution</h4>
<div>
As mentioned in the beginning, this is the program that requires care, caution and planning before implementing. As a tax professional, it is the program that causes me the greatest consternation. Taxes deferred can easily become a liability that cannot be paid. While in the short term, the program provides a tremendous relief to the employer and the self employed person, in the long run it may also create a burdensome liability that cannot be easily met. Any taxpayer using the program must be aware of the amount of the associated liability. Organizations should record the unpaid tax in a special liability account to provide for clear tracking of amount. Self-employed individuals may want to specifically set up a monthly savings plan to provide for funds at the applicable due dates. In essence, the money is borrowed from the government and, as with any other debt, plans are needed to provide for its repayment. </div>
<div>
<i><b><br /></b></i></div>
Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-31306407370131555132020-04-07T06:01:00.000-07:002020-04-07T06:01:42.172-07:00COVID-19 Update #8 - Update on the Paycheck Protection ProgramThe Paycheck Protection Program has created a whirlwind of activity over the past 10 days. While it was the goal of everyone to provide needed funds quickly, rolling out a $349 billion dollar program is no small feat. Over the past 10 days, the SBA has issued guidance three separate times. Each set of frequently asked questions (FAQs) has answered another debate in the professional and banking communities. There have been winners and losers on both sides of these debates and there have been some surprising resolutions by the SBA. Rather than providing separate blog posts, I have opted to update the original post each time. Therefore, despite the posting date on the blog on this topic of March 30th, please check the date at the top of the blog for the most recent update. The blog has been updated as of April 7, 2020.Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-5491575146241891192020-04-01T09:30:00.000-07:002020-04-03T07:16:01.355-07:00COVID-19 Update #6 - Individual Economic Impact PaymentsTo further assist in stabilizing the economy the CARES Act provides for economic impact payments to be automatically distributed to taxpayers. According to IRS Information Release 2020-61, the payments will begin to be distributed within the next three weeks. While the provision does not directly affect nonprofit organizations and churches, this information does affect your staff, members and those you serve. The following information discusses the various aspects of the this new benefit.<br />
<h4>
Who may receive the payment & how much will it be?</h4>
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The Act provides for a credit on a taxpayer's 2020 Form 1040 of $1,200 to individuals and $500 for each dependent child. (The child must be a dependent under the age of 17. This leaves a large number of young adults who will not be eligible for any payments because they are 17 or older and still dependents of their parents.) The full credit is provided to tax filers whose adjusted gross income does not exceed $75,000 for single taxpayers and $150,000 for married couples filing a joint return. For those with adjusted gross income in excess of these amounts, the credit phases out until it is totally unavailable when the taxpayer's adjusted gross income is $99,000 for single taxpayers and $198,000 for married couples filing jointly. </div>
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While the Act provides for a credit (an item that would be applied directly to a person's federal tax liability) calculated on a person's 2020 Form 1040, the Act also allows for an advance payment of the credit. This is the payment qualifying taxpayers will soon receive from the IRS. When a taxpayer files their 2020 Form 1040, the advance credit will be reconciled to the actual amount allowed. If a greater credit is due, the taxpayer will get the additional amount. This could occur, if the taxpayers income in 2019 (or 2018, see below) is in the range where the credit was either reduced or disallowed when calculating the amount of the advance payment. <br />
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Obviously, the credit and advance system is confusing to taxpayers, so an example might best clarify the situation.<br />
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<b>Example 1:</b> Sue is a single taxpayer making $65,000 a year as reported on her 2019 Form 1040 (Sue is a very with it taxpayer having already filed her return!) The IRS sees that Sue's AGI (adjusted gross income) is less than $75,000, so they send her the full $1,200. Sue enjoys her $1,200 of additional money during our time of economic disruption. In 2021, Sue files her 2020 Form 1040. Sue's return shows the following:<br />
<br />
Economic Impact Credit Allowed: $1,200<br />
Economic Impact Advance Received: $1,200<br />
<br />
Credit to claim against 2020 tax liability: -0-<br />
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The credit/advance arrangement has no affect on Sue's 2020 tax liability. She will have the same tax liability she would have had without the passage of the credit. Therefore, the $1,200 is additional money to Sue.<br />
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<b>Example 2:</b> Sue is a single taxpayer making $105,000 a year as reported on her 2019 Form 1040. The IRS sees that Sue's AGI is more than $99,000, so they do not send her any payment. However, Sue is unable to work all of 2020, so her AGI in 2020 is $50,000. In 2021, Sue files her 2020 Form 1040. Sue's return calculates the economic impact credit as follows:<br />
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Economic Impact Credit Allowed: $1,200<br />
Economic Impact Advance Received: $ -0-<br />
<br />
Credit to claim against 2020 tax liability: $1,200<br />
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Because Sue did not qualify for the advance payment but did qualify for the final credit, she may take the credit against her 2020 income tax liability. The result being that if a taxpayer qualifies for the $1,200 (or any part of it) he/she will get that money either as an advance paid by the IRS in the upcoming weeks or as a credit against income taxes on the 2020 Form 1040. The credit is a gift from Congress that is either received in advance from the IRS or received by reducing the 2020 tax liability. This is simply a timing issue of when you receive the "free" money.<br />
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Initial information indicates that if the reconciliation on the 2020 return determines the advance credit paid was larger than it should have been, the excess received does not have to be paid back. Therefore, the 2020 federal tax liability will either be exactly the same as it would have been without the credit (Example 1) or it will be a little less, creating a refund, with the credit/advance adjustments (Example 2).<br />
<h4>
How will the IRS determine the advance credit payment? </h4>
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The IRS will use a taxpayer's 2019 Form 1040 to determine qualification for the payment and the amount of the payment. If the 2019 return has not been filed, then the IRS will base the payment on the 2018 return. If a taxpayer has not filed a Form 1040 for either 2018 or 2019, they should file a return immediately. </div>
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Many older taxpayers do not file returns since their income is below the filing thresholds. The Act does provide for the IRS to based the payment qualification on the SSA-1099 issued to recipients of Social Security if the tax returns are not available. Therefore, if older taxpayers have not filed due to the filing thresholds, they may still receive their payment. The IRS originally advised these taxpayers to file a return for 2019, so their information is in the system and their payment is not delayed. However, in a recent press release, the IRS has announced they will use the SSA-1099 to determine payment recipients and these taxpayers do not need to file a return to receive a payment. </div>
<h4>
How will the payments be delivered?</h4>
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It is the desire of the IRS to direct deposit the payments into a taxpayer's bank account based on the information provided on the tax return utilized to determine the payment. However, many taxpayers do not include this information on their tax returns unless they are receiving a refund. </div>
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For taxpayers who have not provided banking information on a prior return, the IRS is establishing a web-based portal for taxpayers to use in providing the information to the IRS. If the IRS does not receive any banking information for direct deposit, it will mail checks to the taxpayers. However, this significantly delays a taxpayer receiving the payment. </div>
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The IRS is required to send a notice, by mail, to the taxpayer within 15 days of issuing the payment. The notice will provide IRS contact information for a taxpayer to use, if the payment is not received. </div>
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Note: If a taxpayer's information, either mailing or direct deposit information, on the 2018 Form 1040 has changed and the 2019 Form 1040 has not been filed, then a taxpayer may desire to quickly file the 2019 return with updated information to avoid delays in receiving the advance credit payments. </div>
<h4>
With all the isolation orders, how can a tax return be completed? </h4>
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This is a great question considering many people are currently under an isolation order and most tax preparers have closed their doors to any outside clientele. However, CPA firms and tax preparers are resilient people and most have established mechanisms for continuing to serve their clients. At Sommerville & Associates, P.C. we are utilizing our client portals and electronic communications to continue to prepare returns. Clients are encouraged to submit tax documents electronically through their client portals and completed returns are electronically submitted to the client alleviating any exchange of physical packages. While our staff is working remotely, we continue to work on client returns. Most tax preparers have similar structures in place, so taxpayers should continue to seek a preparer that can move forward in preparing the 2019 Form 1040. The due date for the 2019 Form 1040 has been extended to July 15, 2020 as well as the payment of related taxes. If a taxpayer owes with their 2019 Form 1040, they should still proceed with filing the return. The taxes due with the return would still be due at July 15, 2020. </div>
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<i>As with all of our COVID-19 posts, the information contained in the post is based on guidance issued at the time of the post. Continual guidance is being issued by the IRS and the DOL, so above information may be updated in the future as guidance is published. This blog was updated on 4/3/2020. </i></div>
Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-17519445626882911912020-03-30T12:18:00.001-07:002020-04-07T06:04:57.129-07:00COVID-19 Update #5 - The Paycheck Protection Program - SBA Loans Available to Nonprofit Organizations<i>Special Note: Guidance and information has been issued from several sources over the past week. In an attempt to provide accurate information, this blog post is updated as guidance is issued. This blog was last updated on 4/7/2020 and includes information contained in the SBA Frequently Asked Questions (FAQs) issued on April 6, 2020 . </i><br />
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On March 27, 2020, President Trump signed a second piece of legislation, the Corona Aid, Relief, and Economic Security Act (the CARES Act) geared to keep the economy running during the COVID-19 pandemic. One of the most popular provisions in the legislation is the provision to provide businesses and nonprofits operational loans to assist during this time in keeping employees gainfully employed until the crisis has passed. This provision is known as the paycheck protection program.<br />
<h4>
Source of the Loan</h4>
The loans are financed through the U.S. Small Business Administration (SBA). While typically nonprofit organizations and churches are not eligible for SBA loans, the CARES Act allows 501(c)(3) organizations, including churches, to apply for this program. Congress has allocated $349,000,000,000 for the program.<br />
<h4>
Eligible Organizations</h4>
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Virtually any small business and/or nonprofit organization with less than 500 employees will qualify or that meet one of the other definitions of a "small business enterprise" as defined by the SBA. However, for nonprofit organizations this appears to be a straight up count of employees, both full-time or part-time. Also, business operations that are independent contractors or sole proprietors may qualify for the loan. Nonprofit organizations may require an organization's determination letter as proof of exemption under 501(c)(3). A determination letter is issued to each nonprofit entity when the IRS approves its exempt status.<br />
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The organization must have been in operation on February 15, 2020 and had employees at that date. Additionally, the organization must be prepared to state the loan request is due to economic uncertainty due to the current COVID-19 pandemic.<br />
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<i>Special Note for Churches: Churches exempt under a group ruling issued to a denomination should obtain a letter verifying they are a part of the group ruling and the determination letter issued to the group verifying its exempt status. Churches that have never officially requested IRS recognition of their exempt status and do not belong to a group, may encounter hurdles in verifying their status as a 501(c)(3) organization. However in a set of "frequently asked questions" issued on April 3, 2020, the SBA clarified that churches do not have to formally apply for exempt status. Additionally, after much confusion occurred in the lending community, the SBA clarified that churches do qualify for the PPP assistance and the SBA's nondiscrimination requirements cannot be applied to a church's religious activities. </i></div>
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<h4>
Loan Availability</h4>
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Loans will be available through this program until the earlier of June 30, 2020 or the funds allocated by Congress are utilized. Therefore, early application will assist an organization in securing the loan. The loans may bear an interest rate not to exceed 4%. The SBA has announced that the loan's rate of interest will be 1%. Additionally, lenders are instructed to defer any required loan payments for six months to one year with a potential for all or most of the loan to be forgiven. </div>
<h4>
Potential Funds Available</h4>
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The maximum loan available through this program is 2.5 times the amount of the organization's average monthly payroll costs for the one-year period preceding the date of the loan not to exceed $10 million. (Special rules may apply for organizations in existence for less than 1 year or with seasonal employees.) The SBA has clarified that an employer may use the past 12 months or the calendar year 2019 for determining the potential loan amount. If the 2019 calendar year is used to determine the amount, the employer must also confirm that it had employees at 2/15/20. Therefore, a payroll run covering that time period may also be requested. </div>
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Payroll costs include:<br />
<ul>
<li><span style="font-family: "cambria" , serif; text-indent: -0.25in;">Salaries
and other wages</span></li>
</ul>
<ul>
<li><span style="font-family: "cambria" , serif; text-indent: -0.25in;">Employer-paid
health care benefits</span></li>
</ul>
<ul>
<li><span style="font-family: "cambria" , serif; text-indent: -0.25in;">Employer-paid
retirement benefits</span></li>
</ul>
<ul>
<li><span style="font-family: "cambria" , serif; text-indent: -0.25in;">Employer-paid
state and local payroll taxes</span></li>
</ul>
<span style="font-family: "cambria" , serif;">Payroll costs do not include: </span><br />
<ul>
<li><span style="font-family: "cambria" , serif;">The amount of cash compensation exceeding $100,000 per any employee (clarified by the SBA FAQs issued 4/6/20.)</span></li>
<li><span style="font-family: "cambria" , serif;">Compensation paid to an employee residing outside the U.S.</span></li>
</ul>
<ul>
<li><span style="font-family: "cambria" , serif;">Federal payroll taxes - While the law indicates this includes any taxes withheld from the employee for FICA/Medicare and Federal Income Tax as well as the employer portion of the FICA/Medicare taxes assessed and withheld for the period 2/15/20 to 6/30/20, the SBA states in its FAQs that there would not be a reduction in payroll costs for any taxes withheld from the employee, but the employer share of FICA/Medicare should never be included in the calculation. </span></li>
</ul>
<ul>
<li><span style="font-family: "cambria" , serif;">Any compensation paid under the Families First Coronavirus Response Act for sick leave or family leave (see other related blog posts.)</span></li>
<li>For an employer, payroll costs do not include amounts paid to independent contractors reported on Forms 1099-Misc. This is excluded because these individuals/businesses may apply for the loan on their own. (Clarified by the SBA in FAQs issued on 4/2/20.)</li>
</ul>
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<h4>
<span style="font-family: inherit;">Potential Use of Funds</span></h4>
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<span style="font-family: inherit;">Funds from the loan may be used for: </span></div>
<div>
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<ul>
<li><span style="font-family: inherit;">Payroll Costs as previously defined</span></li>
</ul>
<ul>
<li><span style="font-family: inherit;">Mortgage interest</span></li>
</ul>
<ul>
<li><span style="font-family: inherit;">Interest on other debt </span>obligations<span style="font-family: inherit;"> incurred before February 15, 2020</span></li>
</ul>
<ul>
<li><span style="font-family: inherit;">Rent</span></li>
</ul>
<ul>
<li><span style="font-family: inherit;">Utilities</span></li>
</ul>
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<h4>
Potential Loan Forgiveness</h4>
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Entities receiving these loans may qualify for all or a portion of the loan to be forgiven. The amount to be forgiven is based on the amount spent on the following expenses for the period of eight weeks beginning with the date of the loan. </div>
<div>
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<ul>
<li>Payroll costs</li>
</ul>
<ul>
<li>Mortgage interest payments for loans incurred before February 15, 2020</li>
</ul>
<ul>
<li>Rent for lease agreements in force at February 15, 2020</li>
</ul>
<ul>
<li>Utilities that were obligations as of February 15, 2020</li>
</ul>
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Since the purpose of the provision is to keep people working, the amount of the loan forgiven is directly tied to the accomplishment of this purpose. Therefore, the amount of the loan forgiveness is reduced if the recipient reduces its workforce either in numbers of employees or in the amount of salaries paid is significantly reduced. </div>
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The amount forgiven is limited to the principal of the loan and accrued interest. Additionally, only 25% of the amount of the loan can be justified with non-payroll costs; i.e., rent, utilities, etc. The forgiven portion of the loan is not taxable. </div>
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Any portion of the loan that is not forgiven must be repaid within 2 years (the Act states up to 10, but the guidance indicates the loans are 2 year loans.)<br />
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SBA Guidance</h4>
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Guidance from the SBA was issued on 4/2/2020 and can be located at <a href="https://content.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL.pdf">https://content.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL.pdf</a>.<br />
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Application can be located at <a href="https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf">https://www.sba.gov/sites/default/files/2020-04/PPP%20Borrower%20Application%20Form.pdf</a><br />
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Frequently Asked Questions (FAQs) related to faith-based organizations applying for the PPP and the EIDL can be located at <a href="https://www.sba.gov/document/support--faq-regarding-participation-faith-based-organizations-ppp-eidl">https://www.sba.gov/document/support--faq-regarding-participation-faith-based-organizations-ppp-eidl</a><br />
<h4>
Alternate Loan Program</h4>
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Secular nonprofit organizations may also explore the Economic Injury Disaster Loan (EIDL) provided for in earlier legislation. This program may also provide funding for operations but it does not include any loan forgiveness provisions. However, once an organization has applied for this program, it may be eligible for an immediate grant of up to $10,000 in addition to its loan. Organizations who have previously received an EIDL may be eligible to roll it into the Paycheck Protection Loan. </div>
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Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-88471280907654787632020-03-29T15:43:00.000-07:002020-03-29T18:51:40.059-07:00COVID-19 Update #4 - Emergency Family Leave Provisions and Related Tax Credits<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 107%;">On March 18,
President Trump signed into law the Families First Coronavirus Response Act
(the Act, <a href="https://www.blogger.com/null" name="Tb06b138a28e049218c3754ebf20f7849"></a>PL 116-127), which
eased the compliance burden on businesses. The Act includes several tax credits as well as mandated leave requirements. To assist with application of the provisions, the various provisions are discussed in separate blog posts. </span><br />
<h4>
<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 107%;">Required Paid Family Leave for Employees</span></h4>
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 107%;">In addition to the required sick leave employers must offer, the Act also added some emergency provisions to the Family Medical Leave Act of 1993 (FMLA). The effective date of these provisions is April 1, 2020.</span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><br /></span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b>Applicable Employers:</b> While the FMLA does not generally apply to employers with less than 50 employees, the emergency provisions have changed the applicable definitions of "employer" to address the current circumstances. The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of
the Act requires employers with fewer than 500 employees to provide both paid leave (with an administrative exemption for less-than-50-employee
businesses that the leave mandate puts in jeopardy). </span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><br /></span></div>
<div>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b>Required Leave Circumstances:</b> The leave generally is
available when an employee must take off to care for the employee's child under
age 18 because of a COVID-19 emergency declared by a federal, state, or local
authority that either (1) closes a school or childcare place or (2) makes a
childcare provider unavailable. Note: the act specifically indicates an employee's son and/or daughter. This does not extend to care of others at this time. Therefore, it would not extend to employees who need to care for their grandchildren. </span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><br /></span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b>Amount of Required Leave:</b> This amount of paid leave is more extensive than the other required sick leave provisions. (Generally, the first 10 days of leave can be
unpaid. If qualifying, these leave days may have to be considered under the required sick leave provisions of this legislation. For more information on the required sick leave, see Update #2.) After 10 days, then paid leave is required, pegged to the employee's pay rate and
pay hours. The paid leave rate must be at least 2/3 of the employees regular pay, but it may be capped at $200 per day and $10,000 in the
aggregate per employee. </span></div>
<div>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><br /></span></div>
<div>
<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;">For part-time or irregular work schedules, the amount of paid leave is calculated based on the average number of hours the employee was scheduled to work per day for the last six months prior to the date the leave starts. </span></span></div>
<div>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><br /></span></div>
<div>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b>Eligible Employee: </b> An eligible employee is an employee who has been employed for 30 days. If an employee was laid off after March 1, 2020 and has been rehired, he/she must have been employed for 30 out of the last 60 days prior to the lay off. </span><br />
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><br /></span>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b>Taxation of Wages: </b> The required leave payments are taxable, but the compensation is not subject to the employer's portion of OASDI (Social Security tax of 6.2%)</span></div>
<h2>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;">Corresponding Tax Credits for Paid Family Leave</span></h2>
<div>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b>Tax Credits for Employers</b></span><br />
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b><br /></b></span>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b>Calculating the Credit: </b> The credit consists of the amount of:</span></div>
<div>
<ol>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">The wages paid for the family leave (see note below) subject to the above discussed limits; and </span></li>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">The amount of the cost of maintaining a health plan that is allocable to the paid leave time.</span></li>
</ol>
<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;">In addition to the base calculation for the credit, an employer is also eligible for a credit on the employer's portion of the Medicare taxes paid on the family leave wages paid. </span></span></div>
<div>
<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;"><br /></span></span></div>
<div>
<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;"><i>Nuance for churches and ministers: The definition of wages eligible for the credit is defined by IRC Section 3121(a). Wages paid to ministers performing ministerial duties and to employees of churches that have elected out of the FICA/Medicare system are not wages for purposes of IRC Section 3121(a). Therefore, the wages paid to ministers and to employees of "electing" churches are not eligible for the credit. Unless guidance is issued to the contrary, these individuals will need to look to the provisions for self-employed taxpayers to claim the credits. See the discussion below on self-employed taxpayers claiming a family leave credit. </i></span></span></div>
<div>
<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;"><br /></span></span><span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b>Claiming the Credit:</b> The tax credit corresponding with the EFMLEA mandate is a credit
against the employer's 6.2% portion of the Social Security (OASDI) payroll tax. In the event the credit is more than an employer's OASDI, then the amount is refundable. </span></div>
<div>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><br /></span></div>
<div>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><i>Note: While guidance as to how to claim the credit is still forth coming, right now we are anticipating the credit being claimed on an employer's Form 941. </i></span></div>
<h4>
<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;">Family Leave Credit for Self-Employed Taxpayers</span></span></h4>
<div>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;">The Act provides to the self-employed
a refundable income tax credit (including against the taxes on self-employment
income and net investment income) for family leave similar to the self-employed
sick leave credit discussed in a separate blog post</span><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">.</span><br />
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><br /></span>
<b style="color: #252525; font-family: sans-serif; font-size: 13.3333px;">Applicable Taxpayers: </b><span style="color: #252525; font-family: sans-serif; font-size: 13.3333px;">The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer. As noted above, this should also apply to ministers and to employees of churches electing out of the FICA/Medicare program. </span><br />
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b style="font-size: 10pt;">Limit on the Credit:</b><span style="font-size: 10pt;"> The allowable credit is limited to the lesser of either 67% of the average daily self-employment income for the days attributable to family leave or $200 per day. Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days. </span></span><br />
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><span style="font-size: 10pt;">Additionally, the credit is decreased to the extent that the self-employed person has received days of paid sick leave from an employer under the Act. </span><span style="font-size: 10pt;">The credit applies to a period (1) beginning on a date determined by the IRS that is no later than April 2, 2020 and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments. </span></span><br />
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 107%;"><i>Technical guidance from the IRS and the DOL is forthcoming and the above interpretation of the law is subject to change based on newly issued guidance. FAQs from the DOL are available at<a href="https://www.blogger.com/goog_1239831265"> </a></i></span><a href="https://www.dol.gov/agencies/whd/pandemic/ffcra-questions">https://www.dol.gov/agencies/whd/pandemic/ffcra-questions</a>.<br />
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Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-74569225136325180782020-03-29T15:09:00.001-07:002020-03-29T15:09:53.524-07:00COVID-19 Update #3 - Families First Coronavirus Response Act - Sick Leave Tax Credits for the Self-Employed<div class="MsoNormal" style="line-height: 165%; margin-bottom: 5.0pt; margin-left: 5.0pt; margin-right: 0in; margin-top: 5.0pt; mso-hyphenate: none; mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">
<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;"><span style="font-size: 10pt;">On March 18, President Trump signed into law the Families First
Coronavirus Response Act (the Act, </span><a href="https://www.blogger.com/null" name="Tb06b138a28e049218c3754ebf20f7849" style="font-size: 10pt;"></a><span style="font-size: 10pt;">PL
116-127), which eased the compliance burden on businesses. While the Act requires mandated paid sick leave in certain instances (covered in a separate blog post), the Act also provides limited relief for taxpayers who are self-employed. </span></span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;">Tax Credit for Sick Leave </span></h4>
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;">The Act provides a refundable income tax
credit (including against the taxes on self-employment income and net
investment income) for sick leave to a self-employed person by treating the
self-employed person both as an employer and an employee for credit purposes.
Thus, with some limits, the self-employed person is eligible for a sick leave
credit to the extent that an employer would earn the payroll sick leave credit
if the self-employed person were an employee.<o:p></o:p></span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;"><b>Applicable Taxpayers: </b>The taxpayers eligible for this credit are those who regularly carry on a trade or business as defined by IRC Section 1402 and would qualify for the paid leave and the related credits, if they were employees for an applicable employer. </span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;"><i>Warning: An unusual nuance is the law's application to ministers and employees who work for churches making the election under IRC Section 3121(w). Income earned by ministers is taxed under IRC Section 1402 as self-employment income as is income paid to all employees that work for a church electing out of the FICA/Medicare system. Therefore, these employees, even if provided with required sick leave by an employer, must claim the credit on their personal tax returns. The employers will not be eligible to claim the credit. At this time, guidance has not been issued by the IRS to confirm this interpretation.</i></span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;"><b>Qualifying Time: </b>The taxpayer must have incurred days that he/she <b>could not</b> have performed their regular work duties for one of the following stated reasons: </span></div>
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<ol>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">the taxpayer is subject to a Federal, State or local quarantine or isolation order related to COVID-19;</span></li>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">the taxpayer has been advised to self-quarantine due to COVID-19;</span></li>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">the taxpayer is experience symptom of COVID-19;</span></li>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">the taxpayer must care for an individual who is subject to a quarantine order; </span></li>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">the taxpayer is caring for a son or daughter, if the child's school has been closed; or </span></li>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">the taxpayer qualifies due to a subsequent factor defined by the Secretary of Health & Human Services.</span></li>
</ol>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b>Amount of the Credit: </b> The amount of the credit is either $511 per day, not to exceed 10 days, for the days qualifying under #1, #2 or #3 or $200 per day, not to exceed 10 days, for the days qualifying under #4, #5 or #6 above. Accordingly, the self-employed person may receive an income tax
credit with a maximum value of $5,110 or $2,000 per the payroll sick leave
credit. </span><br />
<b style="color: #252525; font-family: sans-serif; font-size: 10pt;"><br /></b>
<b style="color: #252525; font-family: sans-serif; font-size: 10pt;">Limit on the Credit:</b><span style="color: #252525; font-family: sans-serif; font-size: 10pt;"> The allowable credit is limited to either 100% for days qualifying under #1, #2 or #3 or 67% for days qualifying under #4, #5 or #6, of the average daily self-employment income. Average daily self-employment income is determined by taking the self-employment income for the year and dividing by 260 days. Additionally, the credit is decreased to the extent that the self-employed person has received days of paid sick
leave from an employer under the Act. </span><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">The credit applies to a period (1)
beginning on a date determined by the IRS that is no later than April 2, 2020
and (2) ending on December 31, 2020. Applicable taxpayers should be able to estimate the amount of the credit and decrease required estimated tax payments. </span><br />
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><i>Please note that guidance on the legislation is being issued and may provide further clarification on the application and operation of the new law. </i></span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><i>Further analysis of COVID-19 relief legislation is discussed in separate blog posts. </i></span></div>
<br />Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-86299798663368663432020-03-28T14:27:00.000-07:002020-03-29T18:52:22.979-07:00COVID-19 Update #2 - Families First Coronavirus Response Act - Mandated Paid Sick Leave<br />
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;">On March 18, President Trump signed into law the Families
First Coronavirus Response Act (the Act, <a href="https://www.blogger.com/null" name="Tb06b138a28e049218c3754ebf20f7849"></a>PL 116-127), which eased the
compliance burden on businesses desiring to maintain employees in the wake of an inability to continue normal operations. The Act includes several tax credits and a tax exemption that may be applicable to nonprofit organizations as well as for-profit organizations. Since tax credits and employment obligations are combined into the legislation, it is difficult to determine how they stand alone and how they interplay with each other. The goal of this post, and future posts, is to start sorting through the legislation creating understandable guidance specific to nonprofit organizations and churches. </span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;"><b>Note: The following provisions are effective for wages paid starting April 1, 2020</b></span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;">Required Sick Leave </span></h4>
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;"><b>Applicable Employers: </b> The Act act applies to private employers with fewer than 500 employees to provide 80 hours of paid
sick time to employees who are unable to work for virus-related reasons. (An administrative exemption for less-than-50-employee businesses that the leave
mandate puts in jeopardy may be claimed. However, at this time there is no guidance on how this administrative exemption may be claimed or determined.) Applicable employers include nonprofits and churches. Therefore, if your nonprofit organization or church employees more than 50 people, full-time or part-time, this law applies to you. If you have less than 50 full-time and part-time employees, the law may apply to you unless you claim that adhering to the law will place your church or ministry in jeopardy. Failure to comply with the required paid sick leave provisions is a violation of the Fair Labor Standards Act (FLSA) and subjects the offending employer to the penalties.</span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;">To assist in the analysis, the sick leave provisions have been split into two categories.</span></div>
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<span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;"><b>Required Sick Leave Category 1:</b> Employers are required to provide up to 80 hours of paid sick time to qualifying employees (see below for nuances applicable to churches) their regular rate of pay, not to exceed $511 per day ($5,110 overall limit). The provision applies to employees </span><span style="color: #252525; font-family: sans-serif; font-size: 13.3333px;">are unable to work, or telework </span><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">for the following reasons. </span></div>
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<ol>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;">the employee is subject to a Federal, State or local quarantine or isolation order related to COVID-19;</span></li>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;">the employee's health care provided has advised them to self-quarantine; or </span></li>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10.0pt; line-height: 165%;">the employee is experiencing symptoms of COVID-19 and seeking medical assistance. </span></li>
</ol>
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt; line-height: 22px;"><b>Required Sick Leave Category 2: </b> Employers are required to provide up to 80 hours of paid sick time to qualifying employees (see below for nuances applicable to churches) their regular rate of pay, not to exceed $200 per day ($2,000 overall limit). The provision applies to employees </span><span style="color: #252525; font-family: sans-serif; font-size: 13.3333px;">who </span><span style="color: #252525; font-family: sans-serif; font-size: 13.3333px;"> are unable to work, or telework </span><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">for the following reasons. </span></div>
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<ol>
<li><span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;">the employee is caring for an individual who is subject to a Federal, State or local quarantine or isolation order or has been advised to self-quarantine; </span></span></li>
<li><span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;">the employee is caring for a son or a daughter, if the school or the child-care provider has been closed or become unavailable due to COVID-19 (this is a fairly restrictive category and does not include grandchildren); or</span></span></li>
<li><span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;">the employee is affected by COVID-19 in some way specified by the Secretary of Health & Human Services in consultation with the Department of Labor (best interpretation: if the federal government comes up with another reason to let this provision apply, it may do so).</span></span></li>
</ol>
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<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;"><i>Nuances Applicable to Churches: The definition of an employee for the above provisions is based on the definition of an employee for FLSA. The courts have ruled that the FLSA does not apply to employees qualifying for the ministerial exception. Therefore, a case may be made that the above mandated leave requirements do no apply to any church employees meeting the ministerial exception. </i></span></span></div>
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<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;"><b>Notice Requirements: </b>The law requires each employer to post a notice in a conspicuous place available to employees. The DOL has issued a model notice that applies to both the sick leave discussed above and the additions to the Family Medical Leave Act to be discussed in a separate blog. The model notice may be located at </span></span><a href="https://www.dol.gov/sites/dolgov/files/WHD/posters/FFCRA_Poster_WH1422_Non-Federal.pdf">https://www.dol.gov/sites/dolgov/files/WHD/posters/FFCRA_Poster_WH1422_Non-Federal.pdf</a></div>
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Benefits to the Employer</h4>
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<span style="color: #252525; font-family: sans-serif; font-size: 10pt;">Available Credit Against Payroll Taxes: Coupled with the above mandated sick leave requirements, Congress has granted a corresponding tax credit based on the above wages payments. The credit is based on:</span></div>
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<ol>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">Wages paid due to the required sick leave provisions. Wages taken into account cannot exceed the above described wage limits of $511/$5,110 and $200/$2,000 per-employee. (In the event an employer continues an employee's regular pay rate in excess of these limits, the excess is not eligible for the credit.) <b style="font-style: italic;">Warning for churches and religious organizations: </b><i> </i><b style="font-style: italic;">The definition of wages, for purposes of this credit, is defined by IRC Section 3121(a). Wages paid to ministers and wages paid to employees of a church electing out of the FICA/Medicare program are not eligible wages; </b></span></li>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">The amount of certain expenses incurred in connection with a
qualified health plan if the expenses are excluded from employee income and are allocated to the employees' required sick leave wages; and </span></li>
<li><span style="color: #252525; font-family: sans-serif; font-size: 10pt;">The employer's portion of the Medicare tax paid on the applicable wages.</span></li>
</ol>
<span style="color: #252525; font-family: sans-serif; font-size: 10pt;">The credit is applied to the employer's share of OASDI taxes (Social Security tax of 6.2%) with any excess credit being refundable. At this time, it is anticipated that the credit will be allowed on the Form 941. However, in order to allow immediate access to the funds, the IRS has indicated that an employer may determine the amount of the credit and apply it against the employer's required payroll tax deposit for all taxes. </span><br />
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<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;">Additionally, any wages paid as a result of required paid sick leave are not wages for purposes of the calculation of the OASDI taxes (Social Security tax of 6.2%). </span></span></div>
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<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;">Practical Application: Employers must determine the employees that may qualify for the required leave and discuss the arrangements with them. Remember, the provisions don't apply if the employee is still performing services for the employer. When the applicable wages are paid, the employer will need to be able to delineate these wages from any other wages paid. As the wages are paid, a tentative calculation of the credit should be determined to allow for a proper reduction in payroll tax deposits. </span></span></div>
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<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;">As originally stated, the required paid sick leave becomes available for applicable wages paid between April 1, 2020 and December 31, 2020. </span></span></div>
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<span style="color: #252525; font-family: sans-serif;"><span style="font-size: 13.3333px;"><i>Please be aware that guidance is being issued on a regular basis and may provide further clarification on the above information. FAQs from the DOL are available at </i></span></span><a href="https://www.dol.gov/agencies/whd/pandemic/ffcra-questions">https://www.dol.gov/agencies/whd/pandemic/ffcra-questions</a>. <br />
<i style="color: #252525; font-family: sans-serif; font-size: 13.3333px;">Other provisions of the legislation will be covered in other blog posts. </i></div>
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<br />Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-7909589440656090762020-03-28T11:06:00.000-07:002020-03-28T11:06:47.309-07:00COVID-19 Update #1 - IRS Return Filing & Payment ObligationsAt the writing of this post, life has taken a sharp turn from "normal" for everyone across the world. Adjusting to COVID-19 requires most of us to adjust every facet of life from the way we work, to the way we shop, to the way we worship and the way we socialize. This post is the first in a series that is geared to keep the nonprofit community up to date in the tax and accounting changes that may be affecting or will affect your organizations and employees in the coming days. <br />
<h4>
<u>Return Due Dates</u></h4>
<div>
All federal income tax returns due on April 15, 2020 have been automatically extended to July 15, 2020. There is no need to file Form 4868 or Form 7004 to extend these returns. This extension covers all individuals and corporations. However, nonprofit organizations should note that it does not cover information returns. Therefore, nonprofit organizations filing Form 990 must adhere to the original filing deadlines. However, Form 990-T is an income tax return and it has been extended. Additionally, for income tax returns applicable to fiscal years ending in 2019, if a return's original due date or extended due date is April 15, 2020, the due date is extended to July 15, 2020. </div>
<h4>
<u>Income Tax Payments</u></h4>
<div>
2019 payments of income taxes as well as first quarter federal estimated income tax payments have been extended to July 15, 2020. <b>Please note: the quarterly estimated tax payment due June 15, 2020 has not been extended. </b>(Although, one of my creative practitioner friends pointed out that you can make your first quarter estimated tax payment at July 15th large enough to cover the second quarter payment and technically, alleviate the need for a second quarter payment at June 15th.) </div>
<div>
<br /></div>
<div>
Please see upcoming updates in this series regarding the various benefits provided through recent legislation. </div>
<div>
<br /></div>
Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-83531460300847042342019-12-26T09:46:00.000-08:002019-12-26T09:46:23.078-08:00The Repeal of the Taxation of Qualified Transportation Fringe BenefitsEnacting Internal Revenue Code Section 512(a)(7) through the Tax Cuts and Jobs Act 2017, Congress moved into the uncharted territory of taxing nonprofit organizations through the taxation of expenses associated with providing qualified transportation fringe benefits to employees. Seeing this as an equalizer to removing the deduction for the same benefits from for-profit employers, law makers determined having all employers pay the tax on the fringe benefits would be preferential to taxing the employees on the benefits. <br />
<br />
The resulting outcry was enormous especially when both the IRS and the Joint Committee on Taxation made it clear that the "taxable" expenses would include expenses associated with an employer provided parking lot even when the parking represented little or no real value to the employee. Creating a tremendous record keeping burden as well as a tax burden, the outcry from the nonprofit community was swift and loud. <br />
<br />
As early as the summer of 2018, there were bills prepared and presented in both houses of Congress repealing the offensive provision. In the fall of 2018, President Trump announced he would sign legislation repealing the provision, but with the election looming, no action could be achieved from Congress. As 2019 progressed, it became clear sufficient support to remove the offensive provision existed, if it could just be included in legislation that Congress could agree to pass. The mission was accomplished on December 20th when President Trump signed the appropriations bill including the provision to remove Code Section 512(a)(7). The tax provision is not only ended, it is as if it never was. Nonprofit organizations who complied with the tax reporting should look for IRS guidance on how to obtain refunds of previously paid taxes associated with qualified transportation fringe benefits.Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-10994904598574021532019-07-03T03:39:00.000-07:002019-07-03T03:39:58.946-07:00Maximizing and Working with Qualified Charitable Distributions from an IRA<h2>
</h2>
Enacted in 2006 and made permanent as of 2014, Congress provided a vehicle for owners of individual retirement accounts (IRAs) to make charitable contributions without creating adverse tax consequences through a qualified charitable distribution (QCD). With the increase in the standard deduction in 2018 and fewer individuals claiming itemized deductions, more charities are receiving contributions from IRAs. <br />
<br />
<h3>
Qualified Charitable Distribution (QCD)</h3>
<h4>
A QCD is a distribution(s):</h4>
<ul>
<li>coming from any type of IRA, including a Roth IRA, but does not include an IRA utilized in a SEP IRA or a SIMPLE IRA while the participant is still an active participant in the plan;</li>
<li>made directly by the IRA trustee to a Code Section 170(b)(1)(A) charitable organization. This would include most organizations exempt under IRC Section 501(c)(3) organizations with the exception of an organization classified as a supporting organization under 509(a)(3). There is also a prohibition against contributing the funds to a donor advised fund;</li>
<li>that is <u>entirely deductible </u>as a charitable contribution under Code Sec. 170 other than any potential percentage limit imposed by Code Sec. 170(b). There cannot be a benefit given in exchange for the contribution creating a quid pro quo contribution;</li>
<li>documented with a contribution receipt meeting the substantiation requirements of Code Sec. 170(f)(8) (among other requirements, this means the contribution receipt contains the required "no goods or services" statement);</li>
<li>made after the IRA owner turns 70 1/2; and </li>
<li>not exceeding $100,000 per year for the IRA owner. </li>
</ul>
<div>
<h4>
Benefits to the IRA owner:</h4>
</div>
<div>
<ul>
<li>The amount of the QCD is not included in the taxable income of the IRA owner and the owner is not entitled to a charitable contribution for the QCD. Since not all taxpayers benefit from charitable contributions, an adverse tax consequence may be created if the owner of an IRA receives an IRA distribution and subsequently makes a contribution of an equal amount to a qualifying charity. The QCD avoids this consequence since it moves the funds directly to the charity without moving through the separate accounts of the IRA owner. </li>
<li>IRA owners are required to receive minimum distributions (RMD) from their IRAs after they are 70 1/2. Many taxpayers may not desire to receive the minimum distribution and may not have need of the funds. The amount of a QCD may be applied to the RMD and assist in avoiding taxes on the RMD. Therefore, older taxpayers may be able to meet their own personal giving goals and minimize unwanted tax consequences of a RMD. </li>
<li>A QCD may also be made from an inherited IRA as long as the beneficiary has attained age 70 1/2.</li>
</ul>
<h3>
Responsibilities of the Recipient Charity</h3>
<div>
While most of the rules associated with these distribution/contributions fall to the IRA owner, recipient charities must assist the donor/IRA owner in complying with two important aspects of the QCD. </div>
<div>
<br /></div>
<div>
The recipient charity should confirm it is a qualifying charity and it must issue a qualifying charitable receipt according to the requirements of Code Sec. 170(f). Due to the unique tax structure surrounding these transactions, charities should not add these donations to donor records and allow the gifts to be reported on a donor's regular contribution receipt issued at the end of the year. These contributions must be receipted separately from a donor's other contributions to a charity. </div>
<div>
<br /></div>
<div>
The following is a sample of the donor letter that may be used to receipt a QCD: </div>
<div>
<br /></div>
<div>
<i>Dear <u>[Name of Donor]</u>, </i></div>
<div>
<i><br /></i></div>
<div>
<i>Thank you for your charitable gift of $_____________ to [name of church or charity] from your individual retirement account (IRA). We received your gift on ________________ directly from [Name of IRA Administrator/Trustee] This acknowledges that we have received your gift from your IRA and that it is your intention for all or a portion of the gift to qualify as a qualified charitable distribution (QCD) from your IRA under Internal Revenue Code (IRC) Section 408(d)(8).</i></div>
<div>
<i><br /></i></div>
<div>
<i>This letter confirms the receipt of the donation and that [name of church or charity] is a qualified public charity under IRC Section 170(b)(1)(A) and that your donation has not been transferred to either a donor advised fund or a supporting organization defined in IRC Section 509(a)(3). We further confirm that no goods or services have been provided in exchange for the donation. (Churches should also include "other than intangible religious benefits" in the statement). </i></div>
<div>
<i><br /></i></div>
<div>
<i>While your gift may be applied to any pledge or commitment you have made to [Name of church or charity], the QCD is not a tax deductible charitable gift. The gift will not be included on any other charitable contribution receipt issued (or if included on any receipt, it will be listed as a nondeductible donation.) A QCD may count towards your annual IRA required minimum distribution (RMD) and not deemed taxable income. Please consult with your tax adviser regarding these unique rules. </i></div>
<div>
<i><br /></i></div>
<div>
<i>Thank you for your generous support of [name of church or charity].</i></div>
<div>
<i><br /></i></div>
<div>
There is not a penalty to a recipient charity for failing to assist the donor/IRA owner with an appropriate receipt. However, failure to issue the receipt results in the distribution failing to qualify as a QCD and creates a taxable distribution to the donor/IRA owner. <i> </i></div>
<div>
<i><br /></i></div>
<div>
Qualified charitable distributions create a wonderful avenue for donors to support their favorite charities, manage their required minimum distributions from their IRAs and minimize the tax consequences associated with these funds. </div>
<div>
<i><br /></i></div>
<div>
<i><br /></i></div>
<div>
<i><br /></i></div>
<div>
<i><br /></i></div>
<div>
<br /></div>
<div>
<br /></div>
</div>
<div>
<br /></div>
<div>
<br /></div>
<br />
<br />Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-71413087193226568672019-03-18T08:00:00.000-07:002019-03-18T08:00:05.596-07:00<br />
<h2>
<span lang="X-NONE" style="mso-bidi-font-size: 36.0pt;"><span style="font-size: x-large;">Benevolence</span></span></h2>
<h3>
<span lang="X-NONE"><span style="font-size: large;">Meeting the
Ever Increasing Need</span></span></h3>
<h4>
<span lang="X-NONE">What Is Benevolence</span></h4>
<div class="MsoNormal">
Benevolence is <span style="text-indent: -0.25in;">the desire to do good to others, </span><span style="text-indent: -0.25in;">an act of kindness; or a </span><span style="text-indent: -0.25in;">charitable gift. </span>In churches
and other nonprofits, a benevolence program is a program
established to identify and meet the needs of individuals that they cannot meet
themselves. While it is most commonly
considered in light of finances, any program that meets this definition is a
benevolence program. For example, even a
organization providing meals is operating a benevolence program. However, no matter the method of meeting a “need”, there are financial considerations
involved.</div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">
<o:p></o:p></div>
<h4 style="margin-bottom: .0001pt; margin-bottom: 0in;">
<o:p> </o:p>The Concept of a Charitable Class</h4>
<div>
<br /></div>
<div class="MsoNormal">
There is a tax concept in the world of nonprofits
known as “charitable class”.<span style="mso-spacerun: yes;"> </span>If a
program serves no charitable class, then it more than likely does not
meet the test for being a proper exempt purpose program.<span style="mso-spacerun: yes;"> </span>Those who are “poor and distressed or underprivileged” constitute a charitable class. Therefore charitable purposes or exempt purposes include the relief of the poor and distressed. However, the charitable class defined must be of either an
indefinite or sufficient size to avoid benefiting private interests. For example in PLR 201205011 a nonprofit was
denied exemption because it was formed to aid children with special needs, but
they were all of the same family. </div>
<div class="MsoNormal">
<o:p></o:p></div>
<h4>
Qualifying for Benevolence</h4>
<div class="MsoNormal">
There are two facets requiring scrutiny in
operating a benevolence program.<span style="mso-spacerun: yes;"> </span>The IRS generally states that an acceptable
benevolence can be granted to 1) meet a need and 2) that need cannot be met by
the recipient from resources currently available to them.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Determining need requires determining a necessity missing in a person's life. Necessities normally include items such as food, clothing, shelter, transportation
and health care. Determining available resources requires inquiries into why a person can't meed the "need" or provide the "necessity" out of resources already available to them. For
example, after 9/11 many people had resources that were not
available for use to meet basic needs.
Therefore, even though someone has financial resources, if they are
not available for use, they may still qualify for assistance.</div>
<h4>
Structure of a Benevolence Program</h4>
<div class="MsoNormal">
The key to operating a successful benevolence program is in constructing the program.<span style="mso-spacerun: yes;"> </span>The
more structure provided to the program, the more successful it will be and the
easier it is to operate the program.<span style="mso-spacerun: yes;"> </span>For a program to not threaten the exempt status of the
organization/church, it must operate according to a formal structure. (<i style="mso-bidi-font-style: normal;">Church in Boston</i>, 71 T.C. 102 & PLR
201235022)</div>
<div class="MsoNormal">
<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<div class="MsoNormal">
Successful programs contain these aspects:</div>
<div class="MsoNormal">
</div>
<ul>
<li>A method of verifying the
person is a member of a valid charitable class, i.e., that they have a need and it cannot be met out of their currently available resources. This
generally requires an application besides a potential interview
with the applicant. The documentation will:</li>
<ul>
<li>support the church’s decision to make
the payment;</li>
<li>prove that the payment is
within the guidelines established by the church; and </li>
<li>prove that the payment
fulfills the church’s exempt purposes.</li>
</ul>
<li>.A set of guidelines provides staff with the tools to operate the
plan. Common items addressed in the guidelines or the policy include:</li>
<ul>
<li>Who has the authority to
approve a request at various dollar thresholds;</li>
<li>What types of needs will be considered;</li>
<li>What type of third party
confirmation is needed to confirm the existence of the need;</li>
<li>What proof of other
resources is required;</li>
<li>Who is the targeted group
to be considered; i.e., is it just church members; is it active
church members or just members?
<i>CAUTION: Do not link
approval of a benevolence request to a person’s tithing records</i>; </li>
<li>Determination of situations that disqualify an applicant;</li>
<li>The actions an applicant must take to secure the assistance;</li>
<li>How will the need be met, i.e. payments to requester or payments be made directly to a third party benefiting the requester;</li>
<li>How will requests for
multiple requests be handled; </li>
<li>How will requests from
employees and their family members be handled; and</li>
<li>The process for making
the requests.</li>
</ul>
<li>A manner of reviewing the
above information by persons independent or disinterested from the person
making the request.</li>
</ul>
<h4>
Repeat Requests</h4>
<div class="MsoNormal">
While most benevolence plans deal primarily with short term
needs, plans must exist to deal with circumstances presenting long term needs.<span style="mso-spacerun: yes;"> P</span>eople
encounter extended illnesses prohibiting them from working and
providing for their families or a single parent struggles to support their family even though she/he is gainfully employed.<span style="mso-spacerun: yes;"> </span>Long term situations should be cautiously supported by an organization taking these steps:</div>
<div class="MsoNormal">
</div>
<ul>
<li>Have the appropriate
committee approve the situation;</li>
<li>Perform regular
reevaluations of the situation to document that the need continues to
exist; and</li>
<li>Assist the recipient in
exploring other sources to meet a continued need.</li>
</ul>
<h4>
Designated Gifts</h4>
It is not acceptable for an organization to accept contributions earmarked for an individual, even when a need is justifiable. <span style="mso-spacerun: yes;">An organization, including a church, may not </span>solicit funds for a specific person. An organization may solicit for additional funds to increase its overall benevolence funds and provide funds in response to an unusual need. However, it must be clearly conveyed to donors that the organization is the one making
the final determination as to the amount of assistance that any recipient will
receive.<span style="mso-spacerun: yes;"> </span><br />
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<span style="mso-spacerun: yes;"><br /></span></div>
<div class="MsoNormal">
An organization should have a practice that consistently states that any designation by a donor is a “suggestion” and the final use of all
funds is at the discretion of the governing body; i.,e., the finance committee,
board of directors, elders, etc.</div>
<h4>
Employee
Benevolence</h4>
<div class="MsoNormal">
Internal Revenue Code Section 102 specifically states that gifts are not taxable. <span style="mso-spacerun: yes;">The exclusion provided in Section 102 allows benevolence to not be taxable to recipients. However, the exclusion is not available to amounts provided to employees. There are several considerations when working with benevolence related to employees. </span><o:p></o:p></div>
<div class="MsoNormal">
<span style="mso-spacerun: yes;"><br /></span></div>
<ul style="margin-top: 0in;" type="disc">
<li class="MsoNormal" style="mso-list: l1 level1 lfo6;">Regular Employees - Benevolence assistance provided to an employee should be approved as additional
income.<span style="mso-spacerun: yes;"> Consideration must be given to confirm that the total compensation paid to an employee is always reasonable. </span><o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo6;">Employees Considered as
Disqualified Persons under IRC Section 4958 – <span style="mso-spacerun: yes;"> T</span>hese are employees who are in
positions of control and authority.<span style="mso-spacerun: yes;">
</span>All of their income must be reasonable” and
“approved in writing”, so it is imperative that any additional payments to
this group of employees be carefully documented.<span style="mso-spacerun: yes;"> </span>Failure to follow the correct procedures
could cause the assessment of intermediate section ranging from
25% to 200% of the assistance to the disqualified person. Benevolence payments to this group should be made only after great care, consideration and approvals.<o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo6;">Family Members of
Employees – In general benevolence to family members of employees is considered income to the employee, if the employee is responsible
for the care of the family member.<span style="mso-spacerun: yes;"> </span>Sometimes the relationship may not trigger income to the employee as
long as the employee is not a disqualified person. <o:p></o:p></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo6;">Family Members of
Disqualified Persons – Family members of disqualified persons should never be provided assistance unless the same procedures are followed as in the case of the payment of compensation or benevolence to the disqualified person. member, then he/she may not use the church to fulfill
their moral and/or legal obligation.<span style="mso-spacerun: yes;"> </span><o:p></o:p>Failure to follow the correct procedures could cause the assessment of intermediate section ranging from 25% to 200% of the assistance to the disqualified person.</li>
</ul>
<i>Exceptions under IRC
Section 139</i> – IRC Section 139 allows for tax-free assistance/benevolence type payments to be made to employees affected by a qualifying disaster. This would also apply to family members
of the employees affected by a qualifying disaster. Organizations should establish disaster assistance programs separate benevolence assistance programs. Requirements for these programs were discussed in my blog of September 2, 2017.<br />
<h4>
Summary</h4>
<div>
While operating benevolence or assistance programs is a natural activity of many types of nonprofit organizations and most churches, it is necessary the programs operate in compliance with all the rules applicable to nonprofit organizations. Operating a program that cannot justify its assistance fulfills its charitable purposes creates a threat to the organization's tax exempt status.<br />
<ul style="margin-top: 0in;" type="disc">
</ul>
<br /></div>
Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-70570497462129612962019-02-11T08:00:00.000-08:002019-02-11T08:00:01.394-08:00<span style="font-size: x-large;">Compensation Planning</span><br />
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<h3>
Building the Basic Foundation - Part 2</h3>
</div>
<div style="text-align: justify;">
Building off the first four blocks of compensation planning discussed in my post of February 4, 2019, we continue our discussion with a look at the last four basic blocks in compensation planning. </div>
<h4 style="text-align: justify;">
Building Block #5 – Identify What
Is or Can Be Provided</h4>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
Many nonprofit organizations do
not take the time to inventory benefits provided to
employees or benefits that may easily be provided.<span style="mso-spacerun: yes;">
</span>Compensation is more than just an employee's paycheck. An organization must think
broader than just the amounts in the paycheck. Often there are noncash benefits provided or that can be provided.<span style="mso-spacerun: yes;"> </span>For
example, dependent care provided through a nonprofit's daycare operation is
a noncash benefit.<span style="mso-spacerun: yes;"> </span>Other benefit opportunities
are available through the establishment of benefits plans, such as an
educational assistance plans to provide for employees’ extended education and
training, or through benefit plans available offered by national organizations, such as church denominational programs.<span style="mso-spacerun: yes;"> The benefits provided or considered should assist an organization in meeting its goals defined in building block #4.</span><o:p></o:p></div>
<h4 style="text-align: justify;">
Building Block #6 – Valuation of
What is Provided to Employees</h4>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
Since compensation is often
related to the paycheck, it is easy for nonprofit organizations to forget to value other aspects of the compensation package. This oversight may cause organizations to run afoul of the reasonable compensation amounts determined in building
block # 3.<span style="mso-spacerun: yes;"> </span>Organizations may determine an amount of reasonable compensation, but then only compare it to the regular cash salary
paid.<span style="mso-spacerun: yes;"> </span>Reasonable compensation
encompasses all of what is provided to employees and not just cash salary.<span style="mso-spacerun: yes;"> </span>Therefore, value the benefits provided, both the cash and noncash benefit programs.<span style="mso-spacerun: yes;"> </span>After
the valuation has been accomplished, then it's total can be compared to the amount
determined as reasonable compensation in building block #3. <o:p></o:p></div>
<h4 style="text-align: justify;">
Building Block #7 – Write It Down</h4>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
Failing to document processes, procedures and decisions, is one of the greatest weaknesses in
the compensation process performed by nonprofit organizations.<span style="mso-spacerun: yes;"> </span>One of the first documents requested in an
IRS examination are the board minutes for the organization to verify the
documentation to the executives’ compensation packages.<span style="mso-spacerun: yes;"> </span>For religious organizations, a minister’s
housing allowance must be documented in writing prior to its being paid to the
minister.<span style="mso-spacerun: yes;"> </span>Documentation of compensation
decisions provides authorization for the compensation, including benefits, to be provided to employees. Without
documentation, it may be asserted that the compensation was not
authorized.<span style="mso-spacerun: yes;"> </span>Unauthorized compensation
may create inurement of benefit, potentially threatening an organization’s
exempt status, or creating excess benefit transactions, potentially resulting in
excise taxes. <o:p></o:p></div>
<h4 style="text-align: justify;">
Building Block #8 – Set Up the
Payroll Correctly</h4>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
A few years ago, the IRS
instituted a payroll tax compliance initiative and audited 6000 for-profit and
nonprofit organizations.<span style="mso-spacerun: yes;"> </span>The initiative resulted
from the IRS’ frustrations that Forms W-2 only reflect the amounts paid
through the regular paycheck functions of organizations omitting other taxable benefits provided to employees.<span style="mso-spacerun: yes;"> </span>When nonprofit organizations are examined by
the IRS, significant time and attention is spent reviewing operations for
unreported taxable benefits provided to employees.<span style="mso-spacerun: yes;"> </span>Once building blocks
#5 and #6 are a part of the compensation planning process, evaluate the
taxation of each element of the compensation package and then appropriately
adjust the payroll system to properly report taxable compensation.<span style="mso-spacerun: yes;"> </span>Taxation of benefits depends on many
factors. Great care should be taken to address all the factors regarding the
taxation of any specific benefit including any requirements for written plan documents or nondiscrimination requirements.<o:p></o:p></div>
<h4 style="text-align: justify;">
Summary</h4>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<div style="text-align: left;">
Compensation planning can be
complicated.<span style="mso-spacerun: yes;"> </span>Organizations should, at a minimum, address the eight factors discussed in these two blog discussions creating policies and procedures to embody the concepts and objectives.<span style="mso-spacerun: yes;"> </span>There are many excellent resources for compensation planning, and nonprofit organizations have access to more resources than ever before. However, even with available resources, organizations may still struggle getting a compensation structure in place properly. Two resources associated with this author are <i>PPC's Nonprofit Tax and Governance Guide: Helping Organizations Comply</i> available at <a href="https://store.tax.thomsonreuters.com/accounting/Audit-and-Accounting/PPCs-Nonprofit-Tax-and-Governance-Guide-Helping-Organizations-Comply/p/100201592">https://store.tax.thomsonreuters.com/accounting/Audit-and-Accounting/PPCs-Nonprofit-Tax-and-Governance-Guide-Helping-Organizations-Comply/p/100201592</a> and Christianity Today's <i>Church Compensation: From Strategic Plan to Compliance</i> available at <a href="https://store.churchlawandtax.com/church-compensation-from-strategic-plan-to-compliance/">https://store.churchlawandtax.com/church-compensation-from-strategic-plan-to-compliance/</a>. </div>
</div>
Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-28274786195011263462019-02-04T06:00:00.000-08:002019-02-04T06:00:04.372-08:00<span style="font-size: x-large;">Compensation Planning</span><br />
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<h3>
Building the Basic Foundation - Part 1</h3>
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<div style="text-align: justify;">
Virtually all organizations face a lot of moving parts and pieces in establishing
compensation plans for employees, but nonprofit organizations
face even more considerations in the planning process. <span style="mso-spacerun: yes;"> </span><span style="text-align: justify;">In 2012, this blog presented </span><span style="text-align: justify;">a series of </span><span style="text-align: justify;">posts related to compensation planning
and covered many of the planning considerations.</span><span style="text-align: justify;">
</span><span style="text-align: justify;">This presentation summarizes some of the most important aspects of
creating a strong foundation for handling compensation processes in organizations of all
sizes.</span><span style="text-align: justify;"> </span></div>
<span style="text-align: justify;"><br /></span>
<br />
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
There are eight basic blocks to building
a nonprofit organization's foundation for compensation planing.
Four of the blocks are presented in this post with the other four presented in a future blog:<o:p></o:p></div>
<h4 style="text-align: justify;">
Building Block #1 – Define the
Decision Makers</h4>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
Approval of compensation plans is
critical for many positions in nonprofit organizations. Therefore, all organizations should know who makes
decisions on compensation plans and who approves any changes or unusual
transactions during the year. <o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
It isn’t enough to define the
decision makers. Consider any potential
conflicts of interest that may exist in the decision-making process. For individuals defined as “disqualified
persons” under IRC Section 4958, it is critical that the decision makers are
independent of the person being compensated.</div>
<h4 style="text-align: justify;">
Building Block #2 – Define the
Position</h4>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
No one enjoys the tasks of
creating job descriptions, but a strong job description is a valuable building
block in the foundation for compensation planning. Job descriptions should describe the duties
to be performed and the criteria and qualifications required of the person
holding the position. It is also a good
place to define the position for wage and hour rules. For religious organizations, clarify if the
position qualifies under the DOL’s ministerial exception or as a minister under
the IRS rules and regulations. The job
description is the first document requested by either of these regulatory
agencies to support these positions. If
the position should qualify as ministerial for the IRS, the job description should
require ministerial credentials as a part of the position's qualifications. <o:p></o:p></div>
<h4 style="text-align: justify;">
Building Block #3 – Know the
Compensation Limits for a Position</h4>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
While all organizations should
not pay more than “reasonable” compensation,
this requirement is even more important in compensation planning for nonprofit
organizations. The payment of
unreasonable compensation can be cause for the revocation of an organization’s
tax-exempt status and/or the assessment of excise taxes against individuals. Reasonable compensation can be determined
through salary surveys, comparison with other similar organizations and/or
using an outside compensation expert.<o:p></o:p></div>
<h4 style="text-align: justify;">
Building Block #4 – Determine the
Goals of the Compensation Package</h4>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
Funds in nonprofit organizations
are often stretched thin. The result is compensation packages may be below market value for the
position and fringe
benefit plans may be limited. However, it is important
that nonprofit organizations see compensation planning as more than just the
paycheck. A nonprofit organization
should acknowledge the varied needs of its employees and determine what is
important for the organization to provide.
Organizations should consider if they desire or intend to provide for
benefits such as health benefits, retirement needs, educational programs or
dependent care programs. <o:p></o:p></div>
<h4 style="text-align: justify;">
Summary</h4>
<div class="MsoNormal" style="text-align: justify;">
There are many excellent resources for compensation planning. Nonprofit organizations of all types have access to more resources than ever before. However, even with all of the resources, organizations still struggle getting a compensation structure in place properly. Two publications associated with this author are <i>PPC's Nonprofit Tax and Governance Guide: Helping Organizations Comply</i> available at <a href="https://store.tax.thomsonreuters.com/accounting/Audit-and-Accounting/PPCs-Nonprofit-Tax-and-Governance-Guide-Helping-Organizations-Comply/p/100201592">https://store.tax.thomsonreuters.com/accounting/Audit-and-Accounting/PPCs-Nonprofit-Tax-and-Governance-Guide-Helping-Organizations-Comply/p/100201592</a> and Christianity Today's <i>Church Compensation: From Strategic Plan to Compliance</i> available at <a href="https://store.churchlawandtax.com/church-compensation-from-strategic-plan-to-compliance/">https://store.churchlawandtax.com/church-compensation-from-strategic-plan-to-compliance/</a>. </div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
For the final four building blocks in building a solid foundation for an organization's compensation process see next week's blog. </div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
</div>
<br />Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-59483770981637866622019-01-21T08:00:00.000-08:002019-01-22T12:00:40.412-08:00<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-large;">Does Your Organization Need to Pay the “Parking
Lot" Tax?</span></span></b><br />
<div>
<b style="mso-bidi-font-weight: normal;"><span style="font-family: "times new roman" , serif;"><span style="font-size: x-large;"><br /></span></span></b></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<i style="mso-bidi-font-style: normal;"><span style="font-family: "times new roman" , serif;"><span style="font-size: large;">Insights on new guidance from the IRS.<o:p></o:p></span></span></i></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Concerns
and questions arose last year regarding an obscure provision in the Tax Cuts
and Jobs Act of 2017—a provision requiring nonprofit employers pay an unrelated
business income tax for expenses associated with qualified transportation fringe benefit plans provided to employees. <o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Controversy arose surrounding the legislation in regard to its application to parking lots naturally associated with the nonprofit's facilities. Legal
and accounting experts differed on how the so-called “parking lot tax” would
work, and how the Internal Revenue Service would interpret and implement the
new provisions.<span style="mso-spacerun: yes;"> </span>The uncertainty was eased—albeit
temporarily—when interim
guidance was issued in late December.<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<br /></div>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt;">The IRS
has provided its initial interpretation of the new law, which may foreshadow its ultimate
position when it eventually provides permanent guidance. The good news: many
nonprofits, including most churches, will not face this tax. The bad news: some nonprofits
and churches will. The guidance provides a four-step process for determining
whether your organization’s or church’s parking situation will still trigger this
tax.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal">
<b><span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;"><br /></span></b></div>
<h4>
<b><span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">The
Four Steps</span></b></h4>
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">In IRS Notice 2018-99, the IRS provided the recommended analysis. The recommended analysis encompasses 4 steps, but many organizations may stop the analysis after the second step. </span></div>
<h4 style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0in;">
<span style="font-family: "times new roman" , serif; font-size: 12pt;">Step
1:</span></h4>
<div>
<span style="font-family: "times new roman" , serif; font-size: 12pt;"><br /></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0in; mso-add-space: auto;">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Determine
the number of spaces specifically reserved for the organization's employees. The
expenses related to these spaces create unrelated business income.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Example: An organization has 500
parking spaces and designates 50 parking spaces exclusively for employees, then
10 percent of the expenses associated with the parking lot will count as
unrelated business income. (For organizations desiring to avoid this automatic
potential for taxable income, the IRS is allowing employers to remove the
reserved space designation as late as March 31, 2019, and the IRS will consider
it retroactive to January 1, 2018.)</span><span style="font-family: "times new roman" , serif; font-size: 12pt;"> </span></div>
<h4>
<span style="font-family: "times new roman" , serif; font-size: 12pt;">Step
2:</span><span style="font-family: "times new roman" , serif; font-size: 12pt;"> </span></h4>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0in; mso-add-space: auto;">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Determine
the spaces not specifically reserved for any staff members. If at least 51
percent of the remaining spaces in the parking lot are available to the general
public, then all the remaining spaces are <span style="color: black;">considered
as </span>utilized for the general public.<span style="mso-spacerun: yes;">
</span>Expenses related to those spaces do not create unrelated business income.<span style="mso-spacerun: yes;"> </span>For churches, the spaces available to their
attendees are classified as general public use, even if they are unoccupied
most of the time.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Example:<span style="mso-spacerun: yes;"> </span>A museum has 400 parking spaces available in its
parking lot.<span style="mso-spacerun: yes;"> </span>None of the spaces are specifically
reserved for any employees, but employees may utilize <span style="color: black;">any
of </span>the 400 spaces.<span style="mso-spacerun: yes;"> </span>An analysis indicates
the museum has 100 employees regularly using the parking spaces.<span style="mso-spacerun: yes;"> </span>The remaining 300 spaces are available for
the general public, including the organization’s visitors or members. <span style="mso-spacerun: yes;"> </span>Since the 300 spaces for general use are at
least 51 percent of the total spaces, none of the expenses associated the
parking lot are included in unrelated business income. <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Example:<span style="mso-spacerun: yes;"> </span>A church’s denominational offices have a parking
lot with 100 parking spaces.<span style="mso-spacerun: yes;"> </span>Regularly, 75
of the spaces are utilized for the denomination’s employees.<span style="mso-spacerun: yes;"> </span>The remaining 25 of the spaces are available for
the few visitors that may come to the denomination’s offices.<span style="mso-spacerun: yes;"> </span>Since more than 50% of the parking spaces are
used by employees, a portion of the expenses associated with the parking lot
are included in unrelated business income and the organization must proceed to
Step 3 of the process.</span><span style="font-family: "times new roman" , serif; font-size: 12pt;"> </span></div>
<h4 style="margin-left: 0in; mso-add-space: auto;">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Step
3:</span></h4>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0in; mso-add-space: auto;">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">If
it is determined in Step 2 that the parking spaces are not primarily used for
the general public, then determine the number of spaces specifically reserved
for non-employee use. For example, reserved non-employee spaces include spaces
reserved for visitors and customers. The expenses related to these spaces do
not create unrelated business income.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Example:<span style="mso-spacerun: yes;"> </span>The denominational offices have a parking lot
with 100 parking spaces, and it has 10 spaces that are specifically reserved
for visitors and are not available to employees.<span style="mso-spacerun: yes;"> </span>When the expenses are analyzed, 10 percent
(10/100) may be excluded from unrelated business income.<span style="mso-spacerun: yes;"> </span></span><span style="font-family: "times new roman" , serif; font-size: 12pt;"> </span></div>
<h4 style="margin-left: 0in; mso-add-space: auto;">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Step
4: </span></h4>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0in; mso-add-space: auto;">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">If
it is determined in Step 2 that the parking spaces are not primarily used for
the general public, then it must be determined what expenses will be allocated
to the employee spaces. The organization may use an actual number of spaces and
number of days the employees use the parking spaces, or it may adopt any
reasonable method to determine this usage on a typical day. The employee usage
is multiplied by the actual parking expenses to arrive at the unrelated
business income amount. <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 0in; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Example: An organization has 500
parking spaces and regularly has 300 employees utilizing parking spaces. Since
this is the typical use of the parking lot, then the organization may treat 60
percent of its total parking expenses as unrelated business income.</span><span style="font-family: "times new roman" , serif; font-size: 12pt;"> </span></div>
<h4 style="margin-left: 0in; mso-add-space: auto;">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Comprehensive
Example: </span></h4>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">A church’s denominational offices are
in an office building owned by the organization.<span style="mso-spacerun: yes;"> </span>The organization’s parking lot has 150 parking
spaces.<span style="mso-spacerun: yes;"> </span>Ten of the spaces are reserved
for key staff members.<span style="mso-spacerun: yes;"> </span>Ten of the spaces
are specifically marked for visitors and the remaining spaces are available for
employees or other general public use.<span style="mso-spacerun: yes;">
</span>The denominational office employees 85 people that utilize the parking
lot regularly during the normal work week.<span style="mso-spacerun: yes;">
</span>In 2018, the organization spent $5,000 on general maintenance and upkeep
of the parking area. <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Step 1:<span style="mso-spacerun: yes;"> </span>The 10 spaces specifically reserved for the key
staff members represent 6.67% of the parking spaces, so $333.50 (6.67% of the
$5,000) must be included in unrelated business income.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Step 2:<span style="mso-spacerun: yes;"> </span>The remaining 140 spaces are analyzed to see
if more than 50% are utilized for the general public.<span style="mso-spacerun: yes;"> </span>10 spaces are reserved for visitors, so these
10 are used by the “general public”.<span style="mso-spacerun: yes;"> </span>Of
the remaining 130 spaces, 85 spaces (65%) of the spaces are used by
employees.<span style="mso-spacerun: yes;"> </span>Since the employee-use is
more than 50% of the spaces, a portion of the remaining parking lot expenses
must be included in unrelated business income. <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Step 3:<span style="mso-spacerun: yes;"> </span>Before determining the remaining expenses <span style="color: black;">included </span>in unrelated business income, expenses may
be allocated to the parking spots specifically reserved for visitors.<span style="mso-spacerun: yes;"> </span>There were 10 visitor spaces, so 6.67% or
$333.50 of the expenses are allocated to these spaces and are not included in
unrelated business income.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Step 4:<span style="mso-spacerun: yes;"> </span>After allocating expenses to the internally
reserved spaces (Step 1) and to the visitor spaces (Step 3), it is determined
what expenses are allocated to the employee used spaces.<span style="mso-spacerun: yes;"> </span>While there may be more difficult or
extensive calculations, the easiest is to determine the percentage of the
employee used spaces (85) to the total spaces available in the parking lot
(150) and allocate 56.67% (85/150) of the expenses to the employee spaces or
$2,833.50.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpLast">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">The organization must report as
unrelated business income the $2,833.50 (Step 4) plus the $333.50 (Step 1) for <span style="color: black;">a total of </span>$3,166.50 reported on Form 990-T as unrelated
business income. <o:p></o:p></span></div>
<h4>
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Reporting the Unrelated Business Income</span></h4>
<div class="MsoNormal">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Form 990-T is required if unrelated business income
amount is $1,000 or more during the year. The return is due 4 ½ months after
the end of the organization/church’s fiscal year.<span style="mso-spacerun: yes;"> </span>For organizations with a calendar year end, a
return is due May 15, 2019 to report taxable expenses incurred in 2018.<span style="mso-spacerun: yes;"> </span>If a church has another source of unrelated
business income, a loss from the other source may be netted against the income
created through this provision and reduce the tax due.<o:p></o:p></span></div>
<h4>
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Summary</span></h4>
<div class="MsoNormal">
<span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Many organizations may discover they have an expected
filing obligation.<span style="mso-spacerun: yes;"> </span>The IRS’ interpretation
took unexpected turns and created an analysis not anticipated by most tax
professionals.<span style="mso-spacerun: yes;"> </span>Even as this information
is presented, there are actions underway to repeal the provision.<span style="mso-spacerun: yes;"> </span>However, despite broad bi-partisan support, the
repeal has not occurred.<span style="mso-spacerun: yes;"> </span>Organizations
should plan to perform the above analysis and timely file Form 990-T until a
repeal of the law is finalized. <o:p></o:p></span></div>
<div class="MsoNormal">
<i style="font-family: "Times New Roman", serif; font-size: 16px;"><br /></i></div>
<div class="MsoNormal">
<i style="font-family: "Times New Roman", serif; font-size: 16px;">My thanks to Frank Sommerville, JD/CPA for his contribution to this blog post, as it represents our combined efforts to sort through and analyze the requirements of this new provision. </i><i style="mso-bidi-font-style: normal;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">The
above information is adapted <a href="https://www.churchlawandtax.com/web/2018/december/how-to-calculate-your-church-parking-lot-tax.html">from
an article</a> that first appeared on Christianity Today’s ChurchLawAndTax.com.
Used with permission. </span></i><i style="mso-bidi-font-style: normal;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt; line-height: 107%;">Frank
and Elaine Sommerville both serve as editorial advisors for <a href="http://churchlawandtax.com/">ChurchLawAndTax.com</a>. Elaine is also the
author of </span></i><span style="font-family: "times new roman" , serif; font-size: 12pt; line-height: 107%;"><a href="https://store.churchlawandtax.com/church-compensation-from-strategic-plan-to-compliance/?utm_source=Jan%202019%20E%20Sommerville%20Blog%20Post%20Parking%20Lot%20Tax&utm_medium=Web">Church
Compensation: From Strategic Plan to Compliance</a><i style="mso-bidi-font-style: normal;"> (2018, Christianity Today).</i></span></div>
<div class="MsoNormal">
<br /></div>
<br />Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-63461477770420744522018-04-09T07:22:00.001-07:002018-04-09T07:22:39.996-07:00<div class="MsoNormal">
<b><span style="font-family: "Times New Roman", serif; font-size: 18pt;">Unrelated Business
Income - More Than Income These Days</span></b><span style="font-family: "Times New Roman", serif; font-size: 13.5pt;"><o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman", serif; font-size: 12pt;">The tax-exempt community has long been immune from many of the tax
provisions meant to raise tax revenue from the business community by determining certain expenses are not tax deductible. For example, businesses may deduct
only 50% of the amount spent on business meals and certain expenses for
business autos may be limited. Since tax-exempt entities do not calculate
tax on their regular operations, these rules have never affected
them. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman", serif; font-size: 12pt;">The Tax Cuts and Jobs Act of 2017 (the Act) provides lower tax
rates on business activities, but it also reduces several deductions for
various business expenses. One of the deduction eliminated by the Act is
the elimination of deductions for expenses paid by an employer for qualified transportation fringe benefits provided to employees. </span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman", serif; font-size: 12pt;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman", serif; font-size: 12pt;">Qualified transportation fringe
benefits, defined by Internal Revenue Code (IRC) Section 132(f), include: <o:p></o:p></span></div>
<ul type="disc">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Commuter transportation in a commuter vehicle; <o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Transit passes; <o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Qualified parking at regular work facilities; and <o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in; text-align: justify;"><span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Qualified bicycle commuting reimbursement.<o:p></o:p></span></li>
</ul>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Prior
law allowed these benefits to be provided to employees, within certain
limitations, tax-free and allowed the employer to deduct the costs of the
benefit. Therefore, the benefits were a win-win for the employer and the
employee. The Act still allows for an employer to provide the benefits to employees
tax-free, but the employer may no longer deduct the cost of the benefit for
federal income tax purposes. (Since most state tax laws follow federal
tax law, the expenses are also not deductible for state income tax purposes.) <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">How
does this affect the tax-exempt community?
The Act also enacts a new provision for unrelated business taxable income
creating a taxable event when a tax-exempt employer pays these same expenses
for its employees. Since other employers
will pay tax on the costs of the benefits through the disallowance of the
deduction for the benefit, the tax-exempt employers will join them in paying
tax on the costs. IRC Section 512(a)(7) now states that any expenses incurred for
qualified transportation fringe benefits <b>and</b>
are disallowed by IRC Section 274, will be included in unrelated business
taxable income (UBTI). [The provision in IRC Section
512(a)(7) also includes costs associated with on premises athletic facilities, but
the Act did not create a corresponding disallowance under IRC Section 274 for
these expenses. Therefore, at this time,
the costs for on premises athletic facilities are escaping the effect of IRC Section
512(a)(7).]<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><i>Example<o:p></o:p></i></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"><i>A
church, in a large metropolitan downtown area, has limited parking
facilities. Because of limited parking
facilities, employees must pay to park in nearby facilities. The church reimburses its 10 ministers for these
parking expenses. The parking expenses
are $260 per minister, per month, so the full parking reimbursement is a qualified
transportation fringe benefit and is excluded from the ministers’ taxable
income. (The parking benefit is limited to $260 per month.) Because of the new provisions, the church must
file Form 990-T reporting the cost of the benefit, $2,600, as UBTI. After the standard deduction of $1,000
allowed in computing UBTI, the net taxable income is $1,600. The church's tax owed is $336 (calculated at the corporate rate of 21%). </i><o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">While
the provision does not affect most churches, it may affect churches in
metropolitan areas providing parking or transit passes to employees. Churches providing these benefits must understand the benefit has limitations
on the tax-free amount available to employees and the potential of the benefit to create an
income tax and a requirement to file Form 990-T. The new provisions are effective for amounts
paid or incurred after December 31, 2017. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The
essence of the law requires someone to pay tax on the transportation
costs. Therefore, the tax burden may be
shifted to employees by opting to include the value of the benefits in
employees’ taxable income. Employers,
both taxable and tax-exempt, must decide who will bear the new tax burden, the
employer or the employee. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<br />
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<br />
<div>
<br /></div>
<div>
<br /></div>
<div>
<br /></div>
Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-63127583124077753462017-10-30T13:36:00.000-07:002017-10-30T13:36:06.350-07:00Charitable Contributions - A Primer in Preparation for Year End<div style="text-align: justify;">
Often when I present tax updates to nonprofit organizations and churches, a section on charitable contributions is included. These sections discuss unfortunate taxpayers who lost their way in accomplishing a successful tax deduction for their charitable contributions. These cases illustrate the importance for the recipient of charitable contributions to be knowledgeable in the contribution receipting rules. Many disallowed contributions result from a donor's failure to obtain the proper "contemporaneous written acknowledgement", better known as the contribution receipt, from the charity. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
There are only two months left in 2017 and the end of the year is a time of increased giving. Since churches and other charities desire happy donors, it is a fitting time to review the basics of contribution receipting rules to prepare for the increased giving and issuing of annual donation receipts at the end of the year. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Virtually every core contribution rule can be reviewed through a review of <i>Embroidery Express, LLC v. Commissioner,</i> TC Memo 2016-136. The taxpayers were audited for 2004, 2005, 2006 and 2007 and ran afoul of the receipting rules in every way possible. The following is a discussion of the lessons learned from <i>Embroidery Express </i>and owners, Mr. & Mrs. Brent McMinn<i>.</i></div>
<h4 style="text-align: justify;">
Lesson 1: To be tax deductible, the donation must involve a valid exempt organization. </h4>
<div style="text-align: justify;">
The McMinns demonstrate this lesson in two separate scenarios.</div>
<br />
<ul>
<li style="text-align: justify;">Foreign Organizations - In 2004, the McMinns donated $2,600 to Kayit's Children's Home. The Home is based in Mexico and is not organized as a charity in the United States. Donations to foreign organizations are not deductible by U.S. taxpayers (certain exceptions exist for Canadian charities). This rule may also apply when donations made to U.S. charities are specifically earmarked for a foreign organization. The contribution may not be deductible unless the U.S. charity takes and maintains control over the funds. </li>
<li style="text-align: justify;">Unregistered U.S. Charities - Throughout the audit years, the McMinns donated more than $11,000 to R.L. Montgomery Ministries. While Montgomery Ministries is based in the United States, it never registered as a tax-exempt entity or received recognition as a 501(c)(3) organization by IRS. Churches do not have to have status as 501(c)(3) organizations confirmed by the IRS, but all other charities, with gross receipts or more than $5,000, must receive IRS recognition. Donors may look for confirmation of an organization's status online through the IRS Select Check program (<a href="https://apps.irs.gov/app/eos/"> https://apps.irs.gov/app/eos/ </a>).</li>
</ul>
<h4 style="text-align: justify;">
Lesson 2: No contemporaneous written acknowledgement - no deduction for donations of $250 or more.</h4>
<div style="text-align: justify;">
For all donations of $250 or more, the law requires the contribution to be substantiated with a contemporaneous written acknowledgement, otherwise referred to a qualifying donation receipt. The receipt must include a) the amount of cash and a description (but not value) of any property other than cash contributed; b) whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in the receipt and c) a description and good faith estimate of the value of any goods or services provided in exchange for the donation. A receipt is "contemporaneous" if obtained by the earlier of the final due date of the taxpayer's return or the date the taxpayer's return is filed.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The McMinns failed to obtain contemporaneous written acknowledgments for various cash donations and the court disallowed each contribution of $250.</div>
<h4 style="text-align: justify;">
Lesson 3: Noncash donations need a qualifying receipt adequately describing the donated property to be deductible.</h4>
<div style="text-align: justify;">
The McMinns encountered a road block encountered by many donors. The McMinns contributed office furniture and equipment to their church and claimed a donation for $6,950. They obtained contemporaneous written acknowledgment from the church with a generic description of the property on the receipt. Treasury Reg. 1.170A-13(b)(1)(iii) states that the receipt must contain a "description of the property in detail reasonably sufficient under the circumstances." Without adequate description, it is not possible to determine if the value attributable to the item by the taxpayers is reasonable. The McMinns lost the contribution deduction due to the vague description of the property in an otherwise qualifying receipt. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The McMinns are not alone in this trap. Over the past few years, the courts have consistently held the receipt must contain an adequate description of the property given to secure the tax deduction. In <i>Ohde v. Commissioner</i>, T.C. Memo 2017-137, the taxpayers lost contributions of $145,250 to Goodwill for similar reasons. The Ohde's maintained an extensive list of donated items, but the court was not persuaded, since there was no evidence Goodwill had ever seen the listing. In <i>Thad D. Smith v. Commissioner</i>, T.C. Memo 2014-203, the taxpayer lost more than $27,000 in contributions because the receipts issued by AMVETS were pre-signed and contained no descriptions of the donated items. </div>
<h4 style="text-align: justify;">
Lesson 4: Noncash contributions of $5,000 or more of a single item or similar items require an appraisal issued by a qualified appraiser and an acknowledgement by the charity.</h4>
<div style="text-align: justify;">
The McMinns entered into a bargain sale of a 2002 Chevy Suburban to their church and claimed a contribution of more than $15,000 for the donation portion of the transaction. Noncash donations of $5,000 or more require an appraisal to support the value of the donation and the McMinns failed to obtain the appraisal. Information from Kelly Blue Book was deemed insufficient to meet the appraisal qualification. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The appraisal requirement is applicable when one or more items, similar in nature, are donated for a total value of more than $5,000. For example, a collection of books valued at $10,000 requires an appraisal even if each book donated is valued at less than $5,000. The qualifications for the appraiser and the appraisal are stringent. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<u>Special Note:</u> The McMinns case predates Form 1098-C requirements. Today, the recipient organization must issue Form 1098-C to the donor besides other potential documentation requirements. The donor is must attach the Form 1098-C to his tax return to claim the donation. A lesson learned by Mr. Izen, Jr., when his contribution of an airplane, valued at $338,000, to a museum was disallowed. The recipient organization failed to issue Form 1098-C and the related documents did not contain sufficient information to meet all the requirements of a contemporaneous written acknowledgment. [<i>Izen, R. v. Commissioner</i>, 148 T.C. No 5 (2017]. (It also should be noted that the recipient organization can be assessed a penalty for failing to issue Form 1098-C.)</div>
<h4 style="text-align: justify;">
Lesson 5: Out of pocket volunteer expenses may require a contemporaneous written acknowledgment that describes the volunteer services provided by the donor. </h4>
<div style="text-align: justify;">
During 2006, the McMinns traveled to Jamaica as a part of their church's mission trip spending $3,013 for unreimbursed travel expenses. Out of pocket volunteer expenses incurred on behalf of a charity may be deductible contributions. [Treas.Reg. Sec. 1.170A-1(g)] However, as with other contributions, where the expenses exceed $250, a contemporaneous written acknowledgement is required. The acknowledgment need not include the actual amount of the unreimbursed volunteer expenses, but it should describe the volunteer services provided to the charity. The McMinns did not receive the required acknowledgment from their church, so the deduction was disallowed. </div>
<h4 style="text-align: justify;">
Take Aways from the McMinns</h4>
<div style="text-align: justify;">
Only in certain instances must churches and other charities issue a contribution receipt or face a penalty. These instances include complying with Form 1098-C requirements and for contributions of more than $75 where goods or services are provided in exchange for the contribution. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Generally, it is the donor's responsibility to obtain contemporaneous written acknowledgements sufficient to support contribution deductions. However, donors rely on recipient organizations to be knowledgeable of the rules and assist them in obtaining sufficient documentation for contribution deductions. Churches and other charities should:</div>
<div>
<ul>
<li style="text-align: justify;">be aware of and understand the rules applicable to donors;</li>
<li style="text-align: justify;">review receipting practices and determine if they include the following:</li>
<ul>
<li style="text-align: justify;">receipts containing name, address and details of donations are issued for both cash and noncash donations of $250 or more;</li>
<li style="text-align: justify;">receipts contain either a description of the goods or services provided in exchange for a donation or the statement "there were no goods or services provided in exchange for the donations" (religious organizations should include "other than intangible religious benefits" with this statement.);</li>
<li style="text-align: justify;">receipts for volunteer services, especially those including travel, are issued to participants detailing the services provided to the organization; </li>
<li style="text-align: justify;">donations of any mode of transportation; i.e., auto, plane, boat, motorcycle, etc. are reported on Form 1098-C; and </li>
<li style="text-align: justify;">receipts for noncash contributions contain an adequate description of the property donated including the condition of the property (value of property not required or suggested.)</li>
</ul>
</ul>
</div>
<div style="text-align: justify;">
Due to the strict nature of the timing for "contemporaneous" receipts, a donor may not be provided a new receipt or a corrected receipt in the event of an IRS exam. If a donor doesn't have required substantiation at the time the tax return is filed, there is no provision for correction in the future. Time taken now to review organizational receipting practices may be the difference between a donor's success or failure in claiming a tax deduction for charitable contributions.</div>
<div style="text-align: justify;">
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Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-5128922422358836632017-09-25T13:36:00.000-07:002017-09-25T13:36:03.300-07:00Reimbursements for Individual Health Premiums & the Myths of the 21st Century Cures Act<h3>
Background</h3>
<div>
<div style="text-align: justify;">
Among my church clients, one of the most difficult changes from the Affordable Care Act (ACA) was the end of an employer's ability to reimburse employees for individual health insurance premiums. Due to the financial and administrative costs of group health insurance, many small churches and nonprofits reimburse employees for individual health insurance plans. Pre-ACA law allowed this reimbursement and the reimbursement was nontaxable to the employee. </div>
</div>
<div>
<div style="text-align: justify;">
<br /></div>
</div>
<div>
<div style="text-align: justify;">
Under the ACA, such a reimbursement plan became an ineligible health plan subject to fines of $100 per day per participant. The reimbursement still isn't taxable, but the plan creates fines to the employer. In response to the ACA rules, many small employers stopped providing for insurance for employees, a result contradictory to the purposes of the ACA. Other employers weren't aware of the rule changes and continued with plans violating the ACA. (In 2015, the IRS provided relief to employers violating these particular ACA rules by relieving them of any penalties through June 2015. The 21st Century Cures Act provides this relief through December of 2016.)</div>
<h3>
The Myth</h3>
<div>
<div style="text-align: justify;">
In December of 2016, The 21st Century Cures Act (the Act) was signed containing a provision allowing for small employers to reimburse for individual health plan premiums. Unfortunately, the "Cures Act" did not cure the problem for many small employers, but instead created a myth that the problem was cured. Once the Act was signed, word spread that individual health insurance premiums could once again be reimbursed and all the prior ACA created issues were rolled back. Throughout the church and nonprofit community, it was assumed the old ways could be resumed (or continued for those who failed to understand the ACA.) </div>
</div>
</div>
<h3 style="text-align: justify;">
The Truth</h3>
<div>
<div style="text-align: justify;">
It is true that the Act provides for a method of providing health insurance through the reimbursement of individual health insurance premiums. It is not true that the Act allows employers to return to the good ole days of pre-ACA practices. </div>
</div>
<div>
<div style="text-align: justify;">
<br /></div>
</div>
<div>
<div style="text-align: justify;">
The Act created the Qualified Small Employer Health Reimbursement Account (QSEHRA) to provide for an employer's reimbursement of individual health insurance plan premiums and other medical expenses. The QSEHRA is removed from the ACA's definition of a "group health plan". The QSEHRA does not return to the days of old, and churches/nonprofits desiring to utilize the it must understand its rules and limitations.</div>
</div>
<div>
<div style="text-align: justify;">
<br /></div>
</div>
<div>
<div style="text-align: justify;">
A QSEHRA is for:</div>
</div>
<div>
<ul>
<li style="text-align: justify;">employers with fewer than 50 full time equivalent employees (FTEs); and </li>
<li style="text-align: justify;">employers not offering a group health plan.</li>
</ul>
<div style="text-align: justify;">
The QSEHRA must:</div>
<ul>
<li style="text-align: justify;">be a written plan;</li>
<li style="text-align: justify;">include notification of the plan to employees 90 days before the beginning of the year or for new employees, their eligibility for the plan. IRS Notice 2017-20 granted relief from this provision for plans starting in 2017. (There has not been any guidance issued to date, so the penalty relief may be suspended until such guidance is issued.) Penalties for failure to provide the notice are $50 per participant not receiving the notice;</li>
<li style="text-align: justify;">be employer funded - no elective employee salary deferrals may be used;</li>
<li style="text-align: justify;">reimburse for substantiated medical expenses and premiums;</li>
<li style="text-align: justify;">limit reimbursements to annual amounts of $4,950 for an individual or $10,000 for a family plan. If greater amounts are provided, the additional cash must be for unrestricted purposes or a non-qualifying group health plan not complying with the ACA is created;</li>
<li style="text-align: justify;">provide for reimbursements on the same basis for <b>all </b>employees. There may not be variations for position, length of service, etc; </li>
</ul>
<div style="text-align: justify;">
Employees should be aware that an insurance policy obtained from an exchange may be reimbursed, but the employee must notify the exchange of the employer reimbursement and cannot claim the reimbursed portion of the premiums for the premium credit. This educational information is required to be part of any notice given to the employees regarding the plan. </div>
<ul>
</ul>
<div style="text-align: justify;">
For churches/nonprofits desiring to institute a QSEHRA, steps should be taken to establish the plan in writing and to provide notice to the employees of the plan for 2018. While notice requirements may be temporarily suspended, it is best to distribute a notice in accordance with the initial instructions to provide relevant information to employees. Plans reimbursing individual health insurance premiums, outside of a qualifying QSEHRA, should be terminated immediately as such plans are currently subject to ACA penalties. </div>
</div>
<div>
<div style="text-align: justify;">
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Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-65200608508689804912017-09-18T07:45:00.000-07:002017-09-18T08:03:00.231-07:00New Guidance Provided for Determinations of Acceptable Foreign Grant Recipients<h3>
Background</h3>
<div>
<div style="text-align: justify;">
Private foundations have very specific rules applicable to foreign grants that have long been ignored by churches and other public charities. However, with the events of 9-11, governmental scrutiny of any charity's foreign expenditures greatly increased. For charities filing Form 990, information on foreign expenditures is requested each year through Schedule F. Schedule F requires reporting areas of foreign operations as well as a description of foreign activities and foreign recipients. Churches don't file Form 990, so they escape this particular scrutiny by the IRS. However, churches are subject to other filing requirement on foreign activities. For example, when churches have funds in foreign accounts, they are subject to the financial bank account reporting (FBAR) on FinCen 114. (For more information on reporting of foreign assets, including the FinCen 114 go to <a href="https://www.fincen.gov/resources/filing-information">https://www.fincen.gov/resources/filing-information</a>.)</div>
</div>
<div>
<div style="text-align: justify;">
<br /></div>
</div>
<div>
<div style="text-align: justify;">
As the IRS increases scrutiny of all charities' foreign activities, it is necessary to be familiar with the documentation, expected by the IRS, required to support the exempt purposes of the activities. Without any specific guidance for churches and public charities, it is necessary to look to the long standing requirements placed on private foundations' foreign activities. Therefore, when the IRS issues new guidance to private foundations regarding foreign activities, it is wisdom for all charities with foreign activities to become familiar with this guidance and the related criteria.</div>
</div>
<h3 style="text-align: justify;">
Expenditure Responsibility or Equivalency Determinations</h3>
<div>
<div style="text-align: justify;">
Private foundations are required to operate foreign grants under one of two scenarios. <br />
<br />
<ol>
<li>Expenditure responsibility - These requirements state that the grant funds will be segregated from other funds of the foreign charity and that all expenditures will be reported back to the grantor through the use of pictures, written reports, receipts, financial statements or other methods of reporting and documenting how the funds were specifically utilized. Think of this requirement as similar to operating an accountable expense reimbursement plan with the grantee.</li>
<li>Equivalency determination - This is a process in which a qualified professional determines that the foreign recipient organization meets the qualifications of IRC Section 501(c)(3) and grants to it may be treated in the same manner as grants to U.S. 501(c)(3) charities. </li>
</ol>
</div>
</div>
<h3 style="text-align: justify;">
New Guidelines for Equivalency Determinations</h3>
<div>
<div style="text-align: justify;">
IRS Rev. Proc. 2017-53 details out the new standards for equivalency determinations, now to be referred to as "preferred written advice" or PWA. While binding on private foundations, the new standards provide an excellent guide for how churches and other public charities may establish foreign grant programs. The Rev. Proc. states that the equivalency determination is:</div>
</div>
<div>
<br /></div>
<div>
<ul>
<li style="text-align: justify;">Based on current written advice - "Current" is defined as advice based on the grantee's current or previous year. The advice may be relied on for a period of up to two years after the advice is provided depending on how recent the factual information is on which the advice is based. (As long as there is not a relevant law change affecting the advice during this two year period.) </li>
<li style="text-align: justify;">Prepared by a qualified tax practitioner - A qualified tax practitioner is an attorney, a certified public accountant or an enrolled agent who is subject to the IRS Circular 230 standards of practice. </li>
<li style="text-align: justify;">Indicates that the recipient is a qualifying public charity - The foreign grantee must meet the tests be the equivalent of a public charity as defined in IRC Section 509(a)(1), 509(a)(2) or certain 509(a)(3) organizations. This includes churches, schools and hospitals as well as other organizations generally supported by donations or governmental support. For some foreign grantees, this determination is made through specific testing as performed on U.S. public charities by using Form 990 Schedule A. </li>
<li style="text-align: justify;">Includes the statement that the grantor is reasonably relying on the written advice in accordance with IR Reg. Sec. 1.6664-4(c)(1). </li>
</ul>
<div>
The preferred written advice should be in English and all attachments should be translated into English. The advice should contain the following components. </div>
</div>
<div>
<ul>
<li style="text-align: justify;">Copies of the grantee's organizational documents;</li>
<li style="text-align: justify;">Descriptions of the grantee's exempt purposes and how these purposes align with 501(c)(3) exempt purposes;</li>
<li style="text-align: justify;">Confirmation that upon dissolution the grantee's assets will be distributed to another charitable organization for charitable purposes or to a governmental entity;</li>
<li style="text-align: justify;">Confirmation that the grantee does not have shareholders or members with an ownership interest in the grantee and that the grantee's assets will not be used for non-charitable purposes or for the private benefit of an individual except for the payment of reasonable compensation;</li>
<li style="text-align: justify;">Confirmation that the grantee does not directly or indirectly intervene in any political campaign to any extent or work to influence legislation more than as an insubstantial part of its activities;</li>
<li style="text-align: justify;">Disclosures of related or affiliated organizations that control the grantee or work in connection with the grantee;</li>
<li style="text-align: justify;">Details of the grantee's activities, past, present and anticipated over the life or term of the grant. These details should be specific as to sources of revenues and types of expenditures;</li>
<li style="text-align: justify;">References to any relevant federal tax law applying to the grantee's operations;</li>
<li style="text-align: justify;">Confirmation that the grantee has not been identified as or designated as a terrorist organization by the United States government. (While not required, it is recommended that all key individuals associated with the grantee also be screened for terrorist designations.);</li>
<li style="text-align: justify;">If the grantee, is a school, its organizational documents must include the required nondiscrimination policy as applicable to U.S. schools; and</li>
<li style="text-align: justify;">Financial support testing for grantees meeting the "public charity" test under 170(b)(1)(A)(vi) or 509(a)(2). (Form 990 Schedule A schedules may be used for this requirement.) </li>
</ul>
<h3>
Application to Churches and Public Charities</h3>
</div>
<div style="text-align: justify;">
It cannot be disputed that the required documentation of foreign activities is overwhelming and burdensome to a U.S. church or charity. The days of blindly sending money to foreign grantees is over and operating in this manner is dangerous for a U.S. organization. While appearing to be onerous in many aspects, the equivalency determination can alleviate many of the complications for churches and other public charities working in foreign countries. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
For example, a church may have a sister church it supports in Kenya. Generally, the support provided to the Kenyan church must be specifically accounted for with documentation of the expenditures back to the U.S. church. If preferred written advice or an equivalency determination is gained for the Kenyan church, then the U.S. church can provide support with less ongoing paperwork. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
In seeking an equivalency determination, churches and public charities should seek a qualified tax professional with experience with nonprofit organizations with extensive foreign activities. Since, the above requirements are similar to the information provided to the IRS when exemption applications are filed, a professional experienced in filing exemption applications is also preferential. </div>
Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-40551537079615068622017-09-14T14:48:00.001-07:002017-09-14T14:48:34.739-07:00IRS Issues Hurricane Irma Relief with Extended Filing Deadlines<div style="text-align: justify;">
In the wake of Hurricane Harvey, Hurricane Irma unleashed her fury in the Caribbean through the Florida Keys and up through the state of Florida. As with Hurricane Harvey, the IRS is beginning to publish information providing various relief to those individuals and businesses located in the affected areas. </div>
<div style="text-align: justify;">
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<div style="text-align: justify;">
For the federally declared disaster areas in Florida, Puerto Rico, St. John and St. Thomas caused by Hurricane Irma, the IRS has extended the due dates for returns due on or after September 4, 2017 through December 31, 2017 to January 31, 2018. The extension generally applies to all returns due during this time period including Forms 1040 due at October 15, 2017, business returns due September 15 and October 15, 2017, excise and payroll returns due October 31, 2017 and Forms 990 due November 15, 2017. Estimated tax payments due September 15, 2017, December 15, 2017 and January 15, 2018 are also extended until January 31, 2018.</div>
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For employers making federal tax deposits, the deposit delay granted is until September 19, 2017. </div>
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There is no extension of time to file the annual Forms W-2, 1099-series or Forms 941 or 940 that are due at January 31, 2018.</div>
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The extension applies to: </div>
<br />
<ul>
<li style="text-align: justify;">any individual who resides or works within the area; </li>
<li style="text-align: justify;">a relief worker working within the disaster area;</li>
<li style="text-align: justify;">any individual or business whose residence or business isn't in the area, but the records needed to prepare returns are located within the disaster area; and </li>
<li style="text-align: justify;">any estate or trust with necessary records located within the disaster area. </li>
</ul>
<div style="text-align: justify;">
As the IRS processes all the effects of Hurricanes Harvey and Irma and disaster areas are continued to be declared, individuals and employers should continue to monitor the IRS website at <a href="https://www.irs.gov/newsroom/tax-relief-in-disaster-situations">https://www.irs.gov/newsroom/tax-relief-in-disaster-situations</a> for more updates on relief provisions. </div>
Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-81356430826425457012017-09-08T08:03:00.000-07:002017-09-14T14:23:29.499-07:00IRS Provides Relief for Victims of Hurricane Harvey<div style="text-align: justify;">
As the number of counties included in federally declared disaster areas grows, the IRS is actively issuing announcements to provide relief to the victims of Hurricane Harvey. Generally, the relief provisions described below are provided to victims residing in or employed in areas designated by FEMA as disaster areas related to Hurricane Harvey. The updated list of these may be found at <a href="https://www.fema.gov/disasters">https://www.fema.gov/disasters</a>. </div>
<h3 style="text-align: justify;">
Retirement Plans & Hardship Distributions</h3>
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Announcement 2017-11, 2017-39; News Release 2017-141 provides certain allowances may be made to allow for qualified retirement plans, including 403(b) plans, to make loans and/ or hardship distributions to participants. Certain rules are loosened including the definition of an event deemed to be a hardship or the allowance of distributions during employment. The relief does not extend to the 10% early distribution penalty, so this penalty would continue to apply as defined under current rules. Employers, with plans, should review this information to determine if a plan has qualifying provisions and if so, what rules need to be followed to allow for the loans and/or hardship distributions. The relief provisions are intricate in nature and should be followed with care to avoid disqualifying the plan or the distribution. </div>
<h3 style="text-align: justify;">
Leave- sharing Programs</h3>
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Notice 2017-48, 2017-39 IRB; News Release 2017-143 provides guidance for employers desiring to allow employees to participate in a leave-sharing program. A leave-sharing program allows employees to forgo vacation, sick or other personal leave time in exchange for the value of the leave time being contributed to a qualifying charitable organization. The charitable organization must be involved in Hurricane Harvey relief efforts. The employees are not taxed on the value of the forgone time and the employers are allowed to treat the payment to the charity as a business expense under IRC Section 162 rather than a charitable donation under IRC Section 170(c). </div>
<h3 style="text-align: justify;">
Extended Filing Deadlines</h3>
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News Release, IR 2017-135, provides a new due date for returns. Various filing deadlines received an automatic extension of time to file as a result of Hurricane Harvey. Relief is provided to persons residing in the designated areas, businesses located in the designated areas, relief workers to the designated areas and those outside of the area, but whose records may be in the designated areas. For Texas counties, the extended due date is January 31, 2018. This applies to federal income tax returns, federal payroll returns, various excise tax returns, estimated tax payments, and exempt organization information returns with due dates (including extended due dates) falling within the extended time period. </div>
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The delay allowing for tax payment deposits was only extended until September 7, 2017. Currently, all federal tax deposits are expected to be made in the regular "timely" manner. However, the IRS has authority to abate penalties assessed on late tax deposits with a specific request from the taxpayer. If notices are received assessing penalties for the late payment or late deposit of taxes, a taxpayer should write the IRS to detail the reasons for the late payment and request the abatement of related penalties. </div>
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Additional time for filing of payroll reporting forms due at January 31, 2018, such as Forms W-2 and 1099-Misc, has not been granted. </div>
<h3 style="text-align: justify;">
IRC Section 139 Plans - Disaster Relief Assistance</h3>
<div style="text-align: justify;">
Business and nonprofit organizations may establish disaster relief assistance plans under the provisions of IRC Section 139 to assist victims of federally declared disasters. The plans provide a method of assisting persons affected by the disasters, including an organization's employees. Assistance provided through the plans is tax free to the recipient. For more information on these plans, see my blog posting earlier this month. </div>
<h3 style="text-align: justify;">
Conclusion</h3>
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As we move into the weekend, reports of Hurricane Irma indicate another serious disaster will occur. Both taxpayers and employers should be diligent in staying informed regarding relief provisions provided by the IRS. Relief should not be assumed by a taxpayer or employer until it is specifically provided for their location. If Hurricane Irma delivers the devastation possible from a Category 5 hurricane, more disaster relief notices will be issued by the IRS in the days to come. </div>
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<div style="text-align: left;">
More information on the various forms of relief provided by the IRS for victims of Hurricane Harvey is available at <a href="https://www.irs.gov/newsroom/help-for-victims-of-hurricane-harvey">https://www.irs.gov/newsroom/help-for-victims-of-hurricane-harvey</a>. </div>
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Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0tag:blogger.com,1999:blog-1140703898925139039.post-11926650494972084042017-09-02T18:24:00.000-07:002017-09-11T08:26:47.077-07:00Section 139 Plans - Relief in the Midst of Disaster - An Avenue for Employers to Help Employees<div style="text-align: left;">
<span style="font-family: inherit;">As Hurricane Harvey has devastated our Texas coast, we at Sommerville & Associates, P.C. are praying for all of those affected. As is evidenced across the country, everyone is looking for ways to reach out and alleviate any part of the pain and suffering of those affected by the hurricane and the corresponding floods. As the rains continued to fall and the waters rose last week, the estimated recovery costs continued to climb. No one knows what the cost will be, but it is now anticipated the cost will surpass the recovery costs of Hurricane Katrina. </span></div>
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<span style="font-family: inherit;">Many of our churches and nonprofit clients have been directly affected by Harvey, as have many of their employees. With less than 15% of the affected residences insured for floods, much of the costs of rebuilding will come from personal resources supplemented by federal resources. The nonprofit community has a deep desire to assist those in need, both employees and others, and many resources are already flowing into the nonprofit community. </span></div>
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<span style="font-family: inherit;">Nonprofit organizations, especially churches, may operate benevolence programs to assist the community with special needs. Many programs are already established and provide a structure available to assist with needs arising from Harvey. Generally recipients are not taxed on payments from a regular benevolence program, but an organization's employees may not receive tax free payments from a benevolence program due to limitations placed on such programs through IRC Section 102.</span></div>
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<span style="font-family: inherit;">With limitations on assistance from benevolence plans for employees, there aren't many avenues available for employers to offer tax free assistance to employees. After the 9/11 terror attacks, Congress decided to provide an avenue for employer to employee assistance in the case of certain disasters. </span></div>
<h3 style="text-align: justify;">
<span style="font-family: inherit;">Qualifying Disaster Relief – IRC Section 139</span></h3>
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<div class="MsoNormal" style="margin-bottom: 0.0001pt; text-align: justify;">
<span style="font-family: inherit;">Congress
enacted IRC Section 139 in 2002 as a means of clarifying the taxable nature of assistance payments
received to victims of a qualifying disaster. </span></div>
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<span style="font-family: inherit;"><b>Qualifying Disaster</b></span></div>
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<span style="font-family: inherit;">A qualifying disaster is one that is the result of or related to: </span></div>
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</div>
<ul>
<li><span style="font-family: inherit;">a terrorist action;</span></li>
<li><span style="font-family: inherit;">a Presidential declared disaster area; </span></li>
<li><span style="font-family: inherit;">accident involving a common carrier; or</span></li>
<li><span style="font-family: inherit;">any other IRS declared qualifying disaster. </span></li>
</ul>
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<span style="font-family: inherit;">Victims of one of these disasters create a qualifying charitable class allowing assistance to be provided to the victims. This charitable class may include employees, their family members and major donors. While any employer is allowed to set up, these plan are especially advantageous for nonprofit employers who have the ability to raise funds for the plans from donors. </span></div>
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<span style="font-family: inherit;">On
August 26, 2017, President Trump signed a major disaster declaration for
those portions of Texas that Hurricane Harvey severely affected. The designated counties include: Aransas, Bee,
Brazoria, Calhoun, Chambers, Colorado, Fayette, Fort Bend, Galveston, Goliad,
Hardin, Harris, Jackson, Jasper, Jefferson, Kleberg, Liberty, Matagorda,
Montgomery, Newton, Nueces, Orange, Refugio, Sabine, San Jacinto, San Patricio,
Victoria, Waller, and Wharton. This list can continue to grow, and we recommend that employers view the
most accurate list at this FEMA website: <a href="https://www.fema.gov/disaster/4332">https://www.fema.gov/disaster/4332#</a>. <o:p></o:p></span></div>
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<b><span style="font-family: inherit;">Qualifying Payments</span></b></div>
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<span style="font-family: inherit;">Payments for these
expenses are <i>qualified disaster relief
payments</i>:</span></div>
<div>
<ul>
<li><span style="text-indent: -0.25in;"><span style="font-family: inherit;">reasonable
and necessary personal, family, living, or funeral expenses incurred because of
a qualified disaster;</span></span></li>
<li><span style="text-indent: -0.25in;"><span style="font-family: inherit;">reasonable
and necessary expenses for the repair or rehabilitation of a personal residence
due to a qualified disaster (a personal residence can be a rented residence or
one you own); and</span></span></li>
<li><span style="text-indent: -0.25in;"><span style="font-family: inherit;">reasonable
and necessary expenses for the repair or replacement of the contents of a
personal residence due to a qualified declared disaster.</span></span></li>
</ul>
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<span style="font-family: inherit;">Further, recipients of qualified
disaster relief payments do not have to account for all of their expenses, as
long as the payments received are reasonably expected to be equal to the
expenses the recipients incurred.</span></div>
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<span style="font-family: inherit;"><br /></span></div>
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<span style="font-family: inherit;">There are two key
limitations to Section 139. Qualified disaster relief payments do not include:</span></div>
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</div>
<ul>
<li><span style="font-family: inherit;">payments
for expenses otherwise paid for by insurance or other reimbursements; or</span></li>
<li><span style="font-family: inherit;"><span style="text-indent: -0.25in;">income
replacement payments (</span><i style="text-indent: -0.25in;">i.e.</i><span style="text-indent: -0.25in;">, payments
of lost wages, lost business income, or unemployment compensation).</span></span></li>
</ul>
</div>
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<b><span style="font-family: inherit;">Setting Up the Plan</span></b></div>
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<span style="font-family: inherit;">Organizations desiring to set up a Section 139 plan should determine: </span></div>
<div>
<ul>
<li><span style="font-family: inherit;">who will qualify for the assistance; </span></li>
<li><span style="font-family: inherit;">how assistance can be requested (an application is recommended);</span></li>
<li><span style="font-family: inherit;">what type of assistance will be granted; and </span></li>
<li><span style="font-family: inherit;">how the assistance will be paid or provided.</span></li>
</ul>
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<b><span style="font-family: inherit;">Summary</span></b></div>
</div>
<br />
<span style="font-family: inherit;">While a Section 139 plan doesn't provide for all instances where an employer may desire to assist an employee, it is certainly an avenue available to providing assistance during some of the most trying times a community may f</span>ace. For more information regarding these plan or a sample application, please feel free to contact me at elaine@nonprofit-tax.com or find more information and a sample plan at <a href="http://www.wkpz.com/help_for_employers_addressing_disaster.php">http://www.wkpz.com/help_for_employers_addressing_disaster.php</a>. Elaine Sommervillehttp://www.blogger.com/profile/16350000278916745626noreply@blogger.com0