NRA, a 501(c)(3) Organization, is Targeted for Dissolution

Most of us don’t think of the National Rifle Association (NRA) as a 501(c)(3) organization, but it is and it’s registered in New York State.  Section 501(c)(3) is a section of the U.S. Internal Revenue Code (IRC) and a specific tax category for nonprofit organizations, specifically those established as charitable organizations, churches and religious organizations, and private foundations. Organizations that meet the requirements of Section 501(c)(3) are exempt from federal income tax. While the Internal Revenue Service recognizes more than 30 types of nonprofit organizations, organizations that qualify as 501(c)(3) organizations are unique because donations to these organizations are tax-deductible for donors, within certain limits.

Big or small, your 501(c)(3) organization must comply with the IRC requirements and those of the state it files with.  New York non-profits fall under the purview of the NY Attorney General’s office.   Apparently, New York AG Letitia James feels the NRA has violated its rules and has filed a lawsuit seeking to dissolve the NRA. YES, DISSOLVE.  AG James alleges that insiders violated the state’s nonprofit laws by illegally diverting tens of millions of dollars from the group through excessive expenses and contracts that benefited relatives or close associates.

The suit alleges that the longtime CEO and three other top officials “instituted a culture of self-dealing, mismanagement, and negligent oversight at the NRA,” failed to properly manage the organization’s money and violated numerous state and federal laws.  Among the allegations in the suit, the CEO, who is a national figure and has run the NRA for three decades:

• spent NRA funds over the last two years on unwarranted travel consultants;
• flew family members on NRA-paid private jets when he wasn’t aboard and;
• secured a $17 million post-employment contract for himself without board approval.

In the lawsuit, the attorney general’s office is seeking restitution from the individual defendants, removal of the CEO and the group’s general counsel from their positions, and to have the defendants barred from ever serving again as directors of a New York-registered charity.

While this is a high-profile case, it has implications for all 501(c)(3) organizations.  Are you following the guidelines of the IRC and your state?  Are you familiar with them?  You can view our prior blog posts at www.morriscpas.com or call our office for lots more information.  But, be aware of your requirements and the potential consequences for not following them.

We hope you find this helpful but please note that the information contained in this blog, including comments posted by visitors, is provided for informational purposes only and cannot be relied upon for any financial decisions. It should not be construed as, nor is it intended to be, a substitute for obtaining accounting, tax, or other financial advice from an appropriate professional. The reader is directed to consult with their own adviser for guidance on anything contained herein.

Tax Relief under the CARES Act

Dear Clients and Friends:

We hope that you are keeping yourself, your loved ones, and your community safe from COVID-19 (aka the Coronavirus). Along with those paramount health concerns, you may be wondering about some of the recent tax changes meant to help everyone coping with the Coronavirus fallout. In addition to the summary of IRS actions and earlier-enacted federal tax legislation that we previously sent you, we now want to update you on the tax-related provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress’s gigantic economic stimulus package that the President signed into law on March 27, 2020.  This report is separated by benefits for individual and businesses.  This letter is lengthy so please scan headings for topics of interest to you.

We welcome your thoughts and comments. Please contact us any time with questions about the enclosed information or any other matters, whether related to COVID-19 or not.

Assistance for Individuals

Recovery rebates for individuals.  

To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing joints returns. An additional $500 additional payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).

Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or marrieds filing separately), $122,500 (head of household), and $150,000 (joint). There is no income floor or ”phase-in”-all recipients who are under the phaseout threshold will receive the same amounts. Tax filers must have provided, on the relevant tax returns or other documents (see below), Social Security Numbers (SSNs) for each family member for whom a rebate is claimed. Adoption taxpayer identification numbers will be accepted for adopted children. SSNs are not required for spouses of active military members. The rebates are not available to nonresident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.

The rebates will be paid out in the form of checks or direct deposits. Most individuals won’t have to take any action to receive a rebate. IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed). If no 2018 return has been filed, IRS will use information for 2019 provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.

Rebates are payable whether or not tax is owed. Thus, individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.

How big will your stimulus check be?  To find out, simply enter your 2018 or 2019 adjusted gross income (the latest available) into the tool at this website.
https://www.cnbc.com/2020/03/27/the-stimulus-payment-calculator-tells-you-how-much-money-you-could-get.html

Waiver of 10% early distribution penalty.

The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.

Waiver of required distribution rules.

Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.

Charitable deduction liberalizations.

The CARES Act makes four significant liberalizations to the rules governing charitable deductions:

1. Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.
2. The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.
3. Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.
4. For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

Exclusion for employer payments of student loans.

An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.

Break for remote care services provided by high deductible health plans.  

For plan years beginning before 2021, the CARES Act allows high deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.

Break for nonprescription medical products.

For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren’t paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.

Business only provisions

Employee retention credit for employers.

Eligible employers can qualify for a refundable credit against, generally, the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax) for 50% of certain wages (below) paid to employees during the COVID-19 crisis.

The credit is available to employers carrying on business during 2020, including non-profits (but not government entities), whose operations for a calendar quarter have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also available to employers who have experienced a more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding 2019 quarter, with the eligible quarters continuing until the quarter after there is a quarter in which receipts are greater than 80% of the receipts for the corresponding 2019 quarter.

For employers with more than 100 employees in 2019, the eligible wages are wages of employees who aren’t providing services because of the business suspension or reduction in gross receipts described above.

For employers with 100 or fewer full-time employees in 2019, all employee wages are eligible, even if employees haven’t been prevented from providing services. The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in eligible wages and compensation paid by the employer to an employee. Thus, the credit is a maximum $5,000 per employee.

Wages don’t include (1) wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (2) wages taken into account for the employer income tax credit for paid family and medical leave (under Code Sec. 45S ) or (3) wages in a period in which an employer is allowed for an employee a work opportunity credit (under Code Sec. 51 ). An employer can elect to not have the credit apply on a quarter-by-quarter basis.

The IRS has authority to advance payments to eligible employers and to waive penalties for employers who do not deposit applicable payroll taxes in reasonable anticipation of receiving the credit. The credit is not available to employers receiving Small Business Interruption Loans. The credit is provided for wages paid after March 12, 2020 through December 31, 2020.

Delayed payment of employer payroll taxes.

Taxpayers (including self-employeds) will be able to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax and the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer 6.2% Social Security (OASDI) rate). The relief isn’t available if the taxpayer has had debt forgiveness under the CARES Act for certain loans under the Small Business Act as modified by the CARES Act (see below). For self-employeds, the deferral applies to 50% of the Self-Employment Contributions Act tax liability (including any related estimated tax liability).

Net operating loss liberalizations.

The 2017 Tax Cuts and Jobs Act (the 2017 Tax Law) limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks the 80% taxable income limitation and carryback prohibition until 2021.

The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for: (1) a 100% deduction of NOLs arising in tax years before 2018, and (2) a deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.

The provision also includes special rules for REITS, life insurance companies, and the Code Sec. 965 transition tax. There are also technical corrections to the 2017 Tax Law effective dates for NOL changes.

Deferral of noncorporate taxpayer loss limits.  

The CARES Act retroactively turns off the excess active business loss limitation rule of the TCJA in Code Sec. 461(l) by deferring its effective date to tax years beginning after December 31, 2020 (rather than December 31, 2017). (Under the rule, active net business losses in excess of $250,000 ($500,000 for joint filers) are disallowed by the 2017 Tax Law and were treated as NOL carryforwards in the following tax year.)

The CARES Act clarifies, in a technical amendment that is retroactive, that an excess loss is treated as part of any net operating loss for the year, but isn’t automatically carried forward to the next year. Another technical amendment clarifies that excess business losses do not include any deduction under Code Sec. 172 (NOL deduction) or Code Sec. 199A (qualified business income deduction).

Still another technical amendment clarifies that business deductions and income don’t include any deductions, gross income or gain attributable to performing services as an employee. And because capital losses of non-corporations cannot offset ordinary income under the NOL rules, capital loss deductions are not taken into account in computing the Code Sec. 461(l) loss and the amount of capital gain taken into account cannot exceed the lesser of capital gain net income from a trade or business or capital gain net income.

 Acceleration of corporate AMT liability credit.

The 2017 Tax Law repealed the corporate alternative minimum tax (AMT) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years before 2021, at which time any remaining AMT credit could be claimed as fully-refundable. The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and further provides an election to accelerate the refund to 2018.

 Relaxation of business interest deduction limit.

The 2017 Tax Law generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income (ATI). The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest limitation to 50% of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation. For partnerships, the 30% of ATI limit remains in place for 2019 but is 50% for 2020. However, unless a partner elects otherwise, 50% of any business interest allocated to a partner in 2019 is deductible in 2020 and not subject to the 50% (formerly 30%) ATI limitation. The remaining 50% of excess business interest from 2019 allocated to the partner is subject to the ATI limitations. Partnerships, like other businesses, may elect to use 2019 partnership ATI in calculating their 2020 limitation.

Technical correction to restore faster write-offs for interior building improvements.

The CARES Act makes a technical correction to the 2017 Tax Law that retroactively treats (1) a wide variety of interior, non-load-bearing building improvements (qualified improvement property (QIP)) as eligible for bonus deprecation (and hence a 100% write-off) or for treatment as 15-year MACRS property or (2) if required to be treated as alternative depreciation system property, as eligible for a write-off over 20 years. The correction of the error in the 2017 Tax Law restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restores 15-year MACRS write-offs for many leasehold, restaurant and retail improvements.

Accelerated payment of credits for required paid sick leave and family leave.

The CARES Act authorizes IRS broadly to allow employers an accelerated benefit of the paid sick leave and paid family leave credits allowed by the Families First Coronavirus Response Act by, for example, not requiring deposits of payroll taxes in the amount of credits earned.

Pension funding delay.

The CARES Act gives single employer pension plan companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier will be due with interest. Also, a plan can treat its status for benefit restrictions as of December 31, 2019 as applying throughout 2020.

Certain SBA loan debt forgiveness isn’t taxable.

Amounts of Small Business Administration Section 7(a)(36) guaranteed loans that are forgiven under the CARES Act aren’t taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes. The loans have to be made during the period beginning on February 15, 2020 and ending on June 30, 2020.

Suspension of certain alcohol excise taxes.

The CARES Act suspends alcohol taxes on spirits withdrawn during 2020 from a bonded premises for use in or contained in hand sanitizer produced and distributed in a manner consistent with FDA guidance related to the outbreak of virus SARSCoV- 2 or COVID-19.

Suspension of certain aviation taxes.

The CARES Act suspends excise taxes on air transportation of persons and of property and on the excise tax imposed on kerosene used in commercial aviation. The suspension runs from March 28, 2020 to December 31, 2020.

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We wish all of you the very best in a difficult time.

Craig Morris & Company

Out of State Purchases Now Subject to Sales Tax

The Supreme Court, in a 5-4 decision penned by Associate Justice Anthony Kennedy, came down on the side of the states in the landmark case South Dakota v. Wayfair, granting them greater power to require out-of-state retailers to collect sales tax on sales to in-state residents. Chief Justice John Roberts wrote a dissenting opinion.

At issue was the court’s 1992 decision in Quill v. North Dakota, which established the physical presence test for sales and use tax nexus. That was before the surge of online sales, and states have been trying since then to find constitutional ways to collect tax revenue from remote sellers into their state.

“Prior to today, Quill required that, to force out-of-state retailers to collect tax on sales to residents of the state, the out-of-state retailer had to have a physical presence in the state,” said Jon Barooshian, a partner at law firm Bowditch. “Today’s decision makes a dramatic change.”

“The Supreme Court is saying that technology has changed so dramatically that Quill and National Bellas Hess [a 1962 case prohibiting a state from requiring a seller to collect use tax on sales by mail to customers in the state] are basically anachronisms,” he said.

“States like South Dakota will now be allowed to require sellers that are selling substantial amounts of product into the state to collect and remit sales tax,” he said.

Additional litigation might be in the offing, according to Barooshian. “Issues regarding smaller mom-and-pop retailers, and the amount of sales necessary to impose the collection obligation on them, would be decided on a case-by-case basis,” he said.

From Accounting Today

While preparing income tax returns this year, we’ve noticed some disturbing trends.

Headlines indicate that the Tax Cuts and Jobs Act (TCJA), effective in 2018, is a tax reduction for the middle class.  While that may be so for some, it is not so for many.  We’ve noticed two disturbing trends we’d like to address.

Wage earners have recently noticed an increase in their take home pay resulting from an adjustment to withholdings tables.  Employers are required to follow these tables, unless instructed otherwise by the employee.  This adjustment simply reduces the amount of income tax paid to the government for 2018 taxes on your behalf.  Many taxpayers believe this is due to a tax reduction, but often it is not.  For tax returns we’re preparing for clients now, we project 2018 tax results and we’re learning that many of our clients will pay more taxes in 2018 under TCJA.

This is principally the result of two factors, among others.  First, while the standard deduction is now higher at $12,000 for a single taxpayer and $24,000 if married, state taxes paid are limited to $10,000 as itemized deductions beginning in 2018.  That includes the combination of state income taxes and property taxes.  Most homeowners in our area pay significantly more than $10,000 in combined income and property taxes and many have more than the new standard deduction in itemized deductions.

Secondly, the TCJA eliminated the personal exemption amount, $4,050 per dependent in 2017.  For a family of 4, this is a loss of $16,200 in the reduction of taxable income. Combined, we’re seeing that deductions which were frequently in excess of $35,000 will be limited to $24,000 in 2018.

What can you do?  Look at your 2017 income tax return and project changes that might occur in your personal financial situation for 2018.  Then, compute your taxes using the new rates under TCJA. You can find details on rates and other tax changes under “Newsletters”, “Tax Alerts” at www. morriscpas.com (http://www.cmcocpas.com/content/pdf/tax_brief/us/2017_December_Congress-Approves-Overhaul.pdf).  Finally, if you need to change your withholdings taxes for any reason (up or down) submit a revised W-4 form to your employer and add a dollar amount to be withheld from each pay check, if necessary.

We hope you find this helpful but please note that the information contained in this blog, including comments posted by visitors, is provided for informational purposes only and cannot be relied upon for any financial decisions. It should not be construed as, nor is it intended to be, a substitute for obtaining accounting, tax, or other financial advice from an appropriate professional. The reader is directed to consult with their own adviser for guidance on anything contained herein.

Will the New Tax Law Cause a Decline in Charitable Giving?

How much will the new tax reform affect charitable giving to nonprofit organizations? The National Council of Nonprofits estimates the change in the standard deduction will reduce the amount of charitable giving by $13 billion or more each year. Charities are preparing for large declines in 2018, especially from individual donations.

As noted in our previous blog on how the Tax Cuts and Jobs Act affects nonprofit organizations, the new law increases the standard deduction for individuals (to $12,000), couples (to $24,000) and heads of households (to $18,000). Consequently, it’s estimated that more than 90% of taxpayers will claim the standard deduction, as compared to approximately 70% before the Tax Cuts and Jobs Act. In order for a taxpayer to receive a deduction for a contribution they have to itemize deductions and not use the standard deduction. Therefore more than 90% of taxpayers will not receive a tax benefit for any donations they make. Lower tax rates in the new law further serve to reduce the value of charitable contributions to donors.

Many charities have already been forewarned by their donors to anticipate lower contributions in 2018. There is uncertainty from people because they don’t know what their future tax bills will look like. Charities are watching to see whether  donors will have less disposable income to devote to charity or less inclination, due to the loss of a longstanding tax break. Will people stop giving? Will they give as much if they can’t take the deduction?

In addition, the new law doubles the exemption for estates of decedents. As a result, fewer estates will be subject to taxes. The lower exemption rate encouraged donors to make deductible charitable bequests to reduce the value of their estate subject to taxes. The new law will most likely reduce the incentive to make charitable bequests for those estates no longer subject to the estate tax. The National Council of Nonprofits estimates that this will lower charitable contributions by $4 billion annually.

Some charities have said they will focus more on corporations. The corporate tax rate fell from a high of 35 percent to 21 percent.  As a result, businesses should have more funds available for charitable donations, but the reduced tax rate may give them less incentive to lower their tax bill. How much will corporations have to donate? Robert Misseri, president and founder of Guardians of Rescue, an animal rescue and welfare organization  said that going after corporate support is a good idea “in theory,” but “so many organizations are going after that corporate sponsorship and they can support only so many.” It also remains to be seen whether or not corporations will increase their contributions now that their income will be taxed a lower rate.

Other charities are going to focus on their mission and the importance of their cause when appealing to potential donors, asking them to donate with their hearts. Tony Di Spigno, a senior vice president, resource development group, of Enterprise Community Partners Inc., a provider of affordable housing, who has served in the fundraising arms of Habitat for Humanity International and Outward Bound USA, said “For smaller donors we emphasize that we have a cause here that’s solvable…nonprofits have to stress that it’s about the cause and your gift can make a difference.”

Some charities say they will focus on high income individuals, who will benefit more from the new tax bill. Other options for donations include monies from an IRA rollover gift. Contributors over the age of 70½ may take the required distribution from their IRA and make a direct tax-free transfer to charity, without recognizing income from the IRA.  Also, charities can ask donors to make gifts of appreciated securities. The donor can save capital-gain taxes by giving appreciated securities owned for more than a year.  They may also ask donors to increase their charitable gifts this year if the total of the donor’s itemized deductions is going to be close to the new higher standard deduction amount. This might help the donor exceed the standard deduction amount, itemize and receive the tax benefits of doing so. The donor can also itemize in one year and then contribute less the following year thereby taking the standard deduction in the next year, and alternate as such.

Many nonprofit leaders are currently urging Congress to consider new bills that are pending in both the House and the Senate that would create a universal deduction for non-itemizers and give those who don’t itemize incentive to contribute to charities.

With any luck, the new tax law will not have the dire effect on charities as most seem to think it will. But, some major incentives to giving have been eliminated. As the Rev. Gideon Pollach, rector of St. John’s Episcopal Church in Cold Spring Harbor, said, “We’re expecting the worst and hoping for the best.”

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If you would like more information, or would like to discuss any aspect of the Tax Cuts and Jobs Act and how it affects your nonprofit organization, please do not hesitate to contact our office.

 

Please note that the information contained in this blog, including comments posted by visitors, is provided for informational purposes only and cannot be relied upon for any financial decisions. It should not be construed as, nor is it intended to be, a substitute for obtaining accounting, tax, or other financial advice from an appropriate professional. The reader is directed to consult with their own adviser for guidance on anything contained herein.

Tax Reform Act Affects Nonprofit Organizations

On December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law by President Trump, affecting all organizations, including nonprofits. Here are some key provisions of the Act and how they relate to nonprofit organizations.

Contributions Hurt by Limit on Itemized Deductions and Lower Rates

The Act increases the standard deduction for individuals (to $12,000), couples (to $24,000) and heads of households (to $18,000). Consequently, it’s estimated that more than 90% of taxpayers will claim the standard deduction, as compared to approximately 70% before the Act. In order for a taxpayer to receive a deduction for a contribution they have to itemize deductions and not use the standard deduction. Therefore more than 90% of taxpayers will not receive a tax benefit for any donations they make.  For taxpayers who are able to itemize, the Act repeals the “Pease” limitation, which set an overall limit on itemized deductions including charitable contribution deductions. The income-based limitation for cash contributions to public charities and certain private foundations are increasing from 50 percent to 60 percent. The National Council of Nonprofits estimates the change in the standard deduction will reduce the amount of charitable giving by $13 billion or more each year and will cost between 220,000 and 264,000 non profit jobs.  Lower tax rates in the Act further serve to reduce the value of charitable contributions to donors.

One benefit the Act did not affect was the ability to make a qualified charitable distribution (QCD) directly from an IRA. So, for a taxpayer who might consider itemizing, a QCD continues to offer several benefits. First, a QCD counts toward satisfying the individual’s required minimum distribution for that year. Second, the distribution is excluded from the taxpayer’s income; since the contribution isn’t included in income it is in effect a charitable contribution deduction for the donor.

Denial of Charitable Deduction for College Athletic Event Seating Rights

The Act removes tax deductions for contributions related to season tickets for college athletic events. The new tax law will remove an 80% deduction that was previously allowed for taxpayers for donations made in exchange for an opportunity to buy season tickets. The House Ways and Means Committee projects the adjustment will net the government $200 million per year. It is expected to cost individual colleges millions of dollars, as it’s unclear how many alumni or fans will continue to make these donations now that they can’t be taken as tax deductions.

Tax on Highly Compensated Nonprofit Employees

The Act imposes a new 21% entity excise tax on annual compensation paid in excess of $1 million or more to the top five highest paid employees of a nonprofit organization. Certain restrictions do apply.

Inclusion of Certain Fringe Benefits in the Calculation of Unrelated Business Income Tax

Certain fringe benefits provided to employees (qualified transportation fringe benefits, a parking facility used in connection with qualified parking or any on-premises athletic facility) are now considered in the calculation of unrelated business taxable income. Tax exempt organizations providing these types of benefits to their employees will be required to pay a corporate tax rate on the value of these benefits.

Unrelated Business Income Tax (UBIT)

The Act requires that UBIT be calculated separately for each unrelated trade or business activity.  Previously, an organization was able to aggregate all of its income and deductions from all of its businesses in computing UBIT.  Net operating losses (NOLs) are now only available for the trade or business from which the loss arose. An NOL from one line of business cannot be used to offset taxable income from another.

Net Operating Loss Deductions

Previously, net operating losses (NOLs) could be carried forward 20 years or back 2 years to offset unrelated business taxable income.  The Act takes away the ability for a nonprofit organization to carry back any NOLs incurred in 2018 or later.  NOLs can now be carried forward indefinitely, and any losses incurred in 2018 or afterward can only be used against 80% of the organization’s unrelated business taxable income. Therefore, organizations will not be able to use NOLs to entirely eliminate income that is earned from unrelated business activities.

Change in the Estate Tax

The Act doubles the exemption for estates of decedents. As a result, fewer estates will be subject to taxes. The lower exemption rate encouraged donors to make deductible charitable bequests to reduce the value of their estate subject to taxes. The Act will most likely reduce the incentive to make charitable bequests for those estates no longer subject to the estate tax. The National Council of Nonprofits estimates that this will lower charitable contributions by $4 billion annually.

Some items that were discussed, but did not make it into the final bill:

Private Foundation Excise Taxes – The current 1% or 2% excise tax on investment income of private foundations is not changed from current law.

Donor-Advised Funds –There will not be an increase in the reporting and disclosure of donor-advised funds.

Charitable Mileage Deduction –No changes to allow the volunteer mileage rate to be adjusted for inflation.

Political Campaign Activity (Johnson Amendment) –501(c)(3) organizations are still prohibited from endorsing or opposing political candidates.

Private Activity Bonds –No changes to the current law. The House passed version included a provision to make interest on these bonds taxable.

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If you would like more information, or would like to discuss any aspect of the Tax Cuts and Jobs Act and how it affects your nonprofit organization, please do not hesitate to contact our office.

Please note that the information contained in this blog, including comments posted by visitors, is provided for informational purposes only and cannot be relied upon for any financial decisions. It should not be construed as, nor is it intended to be, a substitute for obtaining accounting, tax, or other financial advice from an appropriate professional. The reader is directed to consult with their own adviser for guidance on anything contained herein.

U.S. Tax Bill Hits (almost!) Foreign Airlines

Although it was removed from the final tax bill submitted to Congress, the proposed Senate tax bill had some big changes pending for some foreign airlines. There was an amendment attached to the  bill that would have caused some overseas airlines to pay U.S. corporate taxes on part of their profits. Currently, airlines have to pay taxes only in their own countries, not on income generated abroad. Was this needed or is this just the large U.S. airlines trying to eliminate the competition? While this issue is no longer included on the tax bill, is it dead?

Sen. Johnny Isakson (R-Ga.), whose state is home to Delta Air Lines, said the provision he introduced would “protect Georgia airline employees by ending a tax exemption for airlines based in countries that deny fair market access for U.S.-based airlines.” He continued on by saying that “Foreign airlines should not receive preferential tax treatment if their countries choose not to open their markets to U.S. companies.” The amendment would have broken the current international agreement (“Open Skies”) by requiring foreign carriers to pay a corporate tax rate if their home country doesn’t have a tax treaty with the U.S. and if it’s a location where U.S. major airlines fly into no more than twice weekly. The Senator estimated that the provision would have raised $200 million in revenue from foreign airlines.

The largest U.S. airlines, Delta, American and United, have been asking the U.S. government to get involved for many years. They are looking for restrictions on rival carriers from the Middle East, who the U.S. airlines have accused of competing unfairly in America by accepting subsidies from their rich governments. This allows these foreign airlines to expand without worrying about earning a profit. The largest Middle Eastern Airlines – Emirates, Etihad and Qatar, deny this accusation. The feud between these carriers and the large U.S. airlines began several years ago when the Middle Eastern carriers began to add many new routes to the U.S., using new planes with luxury seats and gourmet food, costing the U.S. carriers business.

But not all airlines have the same attitude regarding these foreign airlines. Advocacy groups, made up of smaller airlines, including Jet Blue and Hawaiian Air, don’t support the position of the large airlines. They have said that this change might cause Open Skies partners to restrict the rights of U.S. airlines, and deter countries from entering into Open Skies agreements with the United States. These groups have said that the Open Skies agreements have brought millions of tourists to the United States. Hawaiian Airlines research claims that adding one daily wide-body flight carrying mostly foreign-originating tourists can result in $65 million in direct spending;  In addition, because of the large amount of international passengers arriving into the United States, business has increased for the smaller carriers. They are now able to add flights created by the demand for connections needed by the large number of international passengers.

It seems that this feud reaches out to Hollywood as well. Several American actresses, including Jennifer Aniston and Jennifer Lopez have been criticized by the U.S. airlines for appearing in ads for these Middle Eastern airlines. One of Jennifer Aniston’s Emirates ads shows her in the ‘nightmare’ scenario of being aboard a non-Emirates flight. A Delta employee reacted to this ad by saying, “For her to be sending that message inside the United States, it hits me right here as a Delta employee.”

Nevertheless, not all foreign airline discussion is bleak. On November 24, 2017, Mumbai International Airport set a new world record, by handling a combined 969 flights. The record is based on the number of flight movements using a single runway. The increase in flights this day was due to a large amount of private and charter flights.

Mumbai airport has 2 runways, but only operates one at a time, as the runways crisscross each other and cannot operate concurrently. As a result, it is technically a single-runway facility.

Mumbai Airport handles 45 million passengers a year and is expected to reach 48 million by early next year. In 2017, it overtook London’s Gatwick Airport as the world’s busiest airport with only one operational runway at a time. Bloomberg states that India’s thriving aviation sector is driven by a combination of cheaper air fares and rising incomes. India’s SpiceJet airline estimates that 97% of the country’s 1.3 billion population has never taken a flight.

Answers to Your Not-For-Profit Most Asked Questions

Lately we’ve received numerous inquiries from Not-For Profit organizations on various topics. Below are some of the questions we thought you might find interesting and will hopefully assist you in managing your Not-For-Profit (NFP) business.

Q: How much should a nonprofit spend on overhead?

A: While there is no set percentage that would indicate that a nonprofit is running effectively, the answer here is typically whatever is necessary to advance the organization’s mission. The instructions from Form 990 defines overhead as a combination of “management,” “general,” and “fundraising” expenses.  These are costs that are necessary to deliver the nonprofit’s mission. Overhead that is too low may impact the efficiency of a nonprofit organization. A better gauge of an efficient nonprofit is its effectiveness and its impact in the community.  But, always remember that donors want to see their contributions going to the mission of the organization, not to overhead.

Q: What happens if my Form 990 is filed late?

A: Don’t be late! There’s a daily penalty for filing Form 990 after the due date. The IRS will impose a penalty of $20 per day for each day the return is late for NFPs that have gross receipts less than $1,000,000 for its tax year, and $100 per day for an organization whose gross receipts exceed $1,000,000. The maximum penalty is $10,000, or 5 percent of the organization’s gross receipts, whichever is less for the smaller NFPs, and $50,000 for the larger organizations.  But, penalties may be waived if there is a valid reason for late filing.  Contact our office if you find yourself in a late filing situation.

Q: How is time donated by volunteers valued?

A: Contributed services received are recognized, according to generally accepted accounting principles (GAAP) if the services received

• create or enhance nonfinancial assets; or
• require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Services requiring specialized skills are provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftsmen.

Contributions fitting this description are recorded at fair market value. In accordance with IRS regulations, nonprofits may not report volunteer time as contributions in line 1 of Parts II or III of Form 990, Schedule A. It may be described in Form 990, Part III, Statement of Program Service Accomplishments.

Q: What are the new changes concerning how to classify and record net assets?

A: Annual financial statements issued for fiscal years beginning after December 15, 2017 will now classify net assets as either with donor restrictions, or without donor restrictions. FASB ASU 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities eliminates the distinction of temporarily or permanently restricted donations.

Q: What are the new revenue recognition standards and how do they affect my NFP?

A: FASB’s new revenue recognition standard (Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606)) will become effective for most not-for-profit (NFP) entities in 2019.

NFPs recognize contributions when an unconditional promise is made. Contributions are not considered contracts with customers and therefore would not fall under Topic 606. Exchange transactions are recognized either at a point in time or over a period of time, based on different factors.

Under the new rules, the term “contract with a customer” will replace “exchange transaction”. The theory will however remain the same. A contribution will continue to be recognized under existing guidance based on the factors in the chart below. A contract with a customer will be recognized either at a point in time or over time as the contract is fulfilled, based on the facts and circumstances. The significant part of the new standard is that revenue recognition should “depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services” (ASC 606-10-05-3). It establishes specific requirements for determining when a transfer occurs, and accordingly, when revenue should be recognized. Fees in the form of membership dues, for example, may require the NFP to provide numerous types of benefits at various points in time, and judgment will have to be used to determine when the revenue is recognized.

Q: Do I need to include a Statement of Functional Expenses in my financial statements?

A: Currently, only “Voluntary Health and Welfare Entities” NFPs are required to present statements of functional expenses, though the AICPA encourages NFP organizations that are supported by the general public to present them. However, effective for annual financial statements issued for fiscal years beginning after December 15, 2017, new rules require NFPs to present expenses by both function and nature in one place. These rules are further discussed in FASB ASU 2016-14.

 Q: How should I allocate functional expenses?

A: Organizations allocate functional expenses differently. Some allocate expenses based on the square footage and apply a percentage based on that to the indirect expenses. Others base their allocation on time or headcount. Most organizations use a combination to produce an accurate approach to expense allocation.

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 Feel free to contact us with any additional questions you may have, or if you would like further information on anything discussed above.

 

Year-End Tax Planning in a Year of Uncertainty

As another year quickly comes to a close, it is more important than ever to think about tax planning and how the Tax Cuts and Jobs Act might impact you. Here are some last minute approaches you may want to consider before heading into the new year. Some are traditional year-end planning techniques, while other strategies are as a result of the passing of the Tax Cuts and Jobs Act.

Expense considerations:

• If you have a home equity loan, think about paying your January 2018 payment now as the interest deduction for interest on home equity indebtedness is no longer allowed. Consider paying off any outstanding home equity loans going forward, if feasible.
• You may want to prepay real estate taxes that are typically due in the first quarter. The new tax laws will allow for a state, local or property tax combined deduction only up to $10,000 in 2018.
• If you typically make estimated tax payments, pay your fourth-quarter estimated tax for state income taxes before year-end, as deductions for state and local taxes will be limited under the new laws (see above). However, be sure to consider the 2017 effects of the Alternative Minimum Tax (AMT).
• Contemplate making charitable contributions before the end of the year. You can also give appreciated stock directly to a charity, which will eliminate the capital gain you might otherwise pay. Individuals over the age of 70 ½ are allowed tax-free distributions from individual retirement accounts to public charities, allowing you to exclude the distribution from income.
• You may also want to pull together all itemized deductions into the current year, as you might not be able to take as many itemized deductions in 2018.
• You can still give gifts up to $14,000 per person, tax free, to each recipient to reduce your taxable estate. Married couples may gift up to $28,000 to each individual, if they elect gift-splitting. If property is given instead of cash, the value of the gift is the fair market value of the property.
• Be aware that the moving expense deduction will be disappearing under the new tax laws, but is still permitted in 2017.

Income related issues:

• It might be advantageous to postpone income into 2018, with the reduced tax rates next year.
• It may be beneficial, if possible, to delay any bonuses until 2018 due to the lower tax rates.
• You can consider delaying plans to sell appreciated assets, redeem U.S. savings bonds, etc.
• The opportunity to unwind the Roth conversion in 2018 has been eliminated.
• Maximize your 2017 retirement contributions to increase your tax savings. You should try to contribute at least enough to take advantage of employer matches made by your company.

Every taxpayer’s situation is different, so please contact our office for specific details about a year-end tax planning strategy tailored to your needs.

For more information on the Tax Cuts and Jobs Act, see the Tax Cuts and Jobs Act newsletter on our website. http://www.cmcocpas.com/newsletters.html

 

 

The Not-For-Profit World is Changing!

The Financial Accounting Standards Board (FASB) has issued new accounting standards, aimed at improving financial reporting by not-for-profit (NFP) companies. How does it affect your company? Here are some of the changes made by Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities:

• Decreases the number of net asset classes from three to two.
  • One will be net assets with donor restrictions and the other will be net assets without donor restrictions.
• Continues to allow not-for-profit companies to choose between the direct method and indirect method for presenting operating cash flows.
  • It eliminates the requirement for those who apply the direct method to perform a reconciliation with the indirect method.
• Requires new disclosures in the financial statements on the liquidity and availability of resources.
  • NFPs are required to note how the organization manages liquidity and communicate the availability of financial assets to meet cash needs as of the date of the statement of financial position to meet cash needs for general expenditures within one year.
  • The additional disclosures will include information about the availability of financial assets due to
    • their nature;
    • external limits imposed by donors, laws, and contracts and;
    • internal limitations.
• Requires a statement of functional expenses, changing how expenses are reported.
  • Expenses are required to be presented in both functional (according to purpose – i.e. program services and supporting activities) and
  • natural classifications (economic benefits received from incurring expenses i.e. salaries, rent, professional fees, supplies, depreciation, interest, etc.).
  • NFPs now need to disclose the methods used to allocate expenses to the functional categories.
• Requires reporting of the underwater endowments (endowments that have a current fair value that is less than the original gift amount) as part of net assets with donor restrictions. It also expands the disclosures about underwater endowments.
• NFP entities must now report investment expenses net, against investment returns. Previously, investment expenses could be reported net, or gross (in expenses). No disclosure of investment expenses is required.

To keep up with all the changes in the NFP environment, software companies have been focusing more than ever before on the not for profit industry. They are continuously updating their software for changes in the regulations and reporting requirements, as well as to keep their software current for advancements in the technical world. Most are trying to integrate the entire not-for-profit company’s needs into one complete software system.

Some of the updates that are appearing are:

• Mobile access for users
• Making the software easier to use
• Improved excel integration
• Improved Dashboards and KPIs
• Automated FASB reporting
• Simplified financial segmentation
• New bank integration
• Ability to e-mail contribution statements to donors
• Pledge tracking
• Donor management features

The amendments will be effective for fiscal years beginning after December 15, 2017 and for interim periods, if applicable, within fiscal years beginning after December 15, 2018. Initial adoption should be for an annual period or the first interim period within the year of adoption. Early adoption is permitted.