Social Impact Insights
Our blog provides insights for social impact professionals in business and nonprofits. We offer advice on making the greatest impact in your organization by giving clear real-world advice on important topics of today.
As a nonprofit organization, you may be familiar with the concept of tax-exempt status. However, it's important to understand that there are some types of income that are not exempt from taxes, known as unrelated business income (UBI) tax.
What is Unrelated Business Income Tax?
Unrelated business income tax is a tax on income that is earned by a nonprofit organization through a trade or business that is not related to the organization's primary exempt purpose. The purpose of this tax is to prevent nonprofit organizations from using their tax-exempt status to gain an unfair advantage over for-profit businesses.
Examples of Unrelated Business Income
Here are fifteen types of income that may qualify as unrelated business income:
Reporting Unrelated Business Income Tax
Nonprofit organizations that earn unrelated business income are required to report it on Form 990-T, also known as the Exempt Organization Business Income Tax Return. The organization must file this form if it has gross income of $1,000 or more from unrelated business activities.
In addition to reporting the income, the organization must also calculate and pay any taxes owed on this income. The tax rate for unrelated business income varies depending on the amount of income earned, but it generally ranges from 21% to 28%.
It's important for nonprofit organizations to understand their obligations when it comes to unrelated business income tax. Failing to report or pay taxes on unrelated business income can result in penalties and potential loss of tax-exempt status.
Consequences of Not Reporting UBI
If a nonprofit fails to file Form 990-T to report their unrelated business income tax (UBIT), they may face penalties and potential loss of tax-exempt status.
The penalty for failing to file Form 990-T is $20 per day, up to a maximum of $10,000 or 5% of the organization's gross receipts, whichever is less. Additionally, if the IRS determines that the failure to file was willful, the penalty increases to $1,000 per day, up to a maximum of $50,000.
In addition to penalties, failing to report UBIT can also jeopardize a nonprofit's tax-exempt status. If the IRS determines that a nonprofit is engaged in a substantial amount of unrelated business activity and has not reported it, the organization may lose its tax-exempt status.
Unrelated business income tax can be a complex topic for nonprofit organizations to navigate, but it's an important aspect of maintaining tax-exempt status and ensuring compliance with tax regulations. By understanding what types of income qualify as unrelated business income and how to report it, nonprofit organizations can protect their tax-exempt status and continue to serve their communities in a financially responsible manner.
Closing down a nonprofit or small business can be a difficult and emotional process. However, it is sometimes necessary due to financial constraints, lack of resources, changes in the market, or other reasons. If you find yourself in this situation, it's important to know the steps you need to take to properly close down your organization. In this blog post, we'll outline the key steps you need to take to close down a nonprofit or small business.
Closing down a nonprofit or small business can be a challenging process, but by following these steps you can ensure that you do so in a responsible and professional manner. If you need help with any of these steps, be sure to consult with legal or financial professionals who can provide guidance and support.
All nonprofits registered as tax-exempt with the federal government must file an annual report with the IRS every year. No matter what income, asset, or activity level, your organization is required to file to maintain your active status as a 501C3 public charity or foundation. These forms may look very scary but are relatively straightforward if you have the right information available to you. You will need detailed information about your financials so access to full bank records is key. Of course, maintaining clean records throughout the year will make filling out the tax forms a breeze.
To fill out an IRS 990 form, you will need to have an EIN, basic organizational information, financial documents and records, information about the organization’s board of directors and officers, and revenue and expenditure information. Depending on the organization’s type, you may need to provide additional information or documents.
The Five Main Types of Tax Exempt IRS 990 Forms
The IRS 990 is an annual report that tax-exempt organizations must file with the Internal Revenue Service (IRS). It provides information about the organization's mission, programs, finances, and activities. There are five main types of 990 filings, and each one has a different purpose and filing requirement.
Each form is slightly different and provides different information. Form 990-EZ is the simplest form and is used to provide basic information about the organization. Form 990 provides more detailed information about the organization's finances, activities, and governance. The Form 990-PF is more detailed and focuses on the private foundation's activities, investments, and charitable giving. Form 990-N is the simplest form and provides basic information about the organization. Form 990-T is solely for tax exempt organizations that have unrelated business income that may be open to tax liabilities.
Option for a Six-Month Extension to File
There is a sixth form you ought to be aware of is Form 8868 "Application for Extension of Time to File and Exempt Organization Return." If the filing deadline is coming up quickly and you do not have all of your financial and organization information ready to submit your annual report tax form, then file an extension. Completing Form 8868 will put in a request to give you permission for a 6-month extension to complete your forms.
What happens if you do not file your IRS 990 form?
Failing to file your IRS 990 form can have serious consequences. The IRS requires organizations to submit a 990 form to remain in compliance with federal tax law. If an organization does not file a 990 form, the IRS may impose penalties and fines. These penalties can range from a small fine to the revocation of the organization’s tax-exempt status.
In addition to penalties from the IRS, not filing a 990 form can also lead to a decrease in donations and grants from donors. Donors and grantmakers often use the 990 form to assess the legitimacy of an organization's work and its financial stability. Without the 990 form, the organization is not likely to receive donations or grants.
Blackbird Philanthropy Advisors is happy to share general information related to nonprofit tax forms, however, we are not accountants. The best way to determine how to complete these forms is by contacting a tax professional who specializes in nonprofit accounting and finance. Contact us and we would be happy to provide a referral to a trustworthy CPA who can help you.
Estate planning requires juggling a variety of decisions involving property, money, and entities. When trying to decide what happens to your valuable possessions, many will usually set aside something to loved ones while also dedicating some of their fortune to a good cause. Those interested in pursuing a philanthropic option can do so by seeking out nonprofit organizations whose missions closely align with your values. When these plans are incorporated, it is known as “planned giving.”
The trend used to be that many philanthropists would leave behind a trust or a foundation for giving to occur after they have passed. The responsibility then falls on heirs to ensure organizations are being properly funded and your wishes are being carried out. But, this tradition has become a way of the past. Many are choosing to give actively throughout their lives rather than saving everything for later. There’s plenty of good that can come from choosing to engage in philanthropy now rather than the future but it is understandable that many considerations come into play when deciding this.
Pros and Cons of Giving Now and Later
There are many routes to take when you are a philanthropist running your own private foundation. When it comes to registering your organization, different factors may come into play when deciding if you are going to register it as a Limited Liability Corporation (LLC) or a 501c3. Some well-known philanthropists like McKenzie Bezos and Mark Zuckerberg have chosen not to register as a 501c3 but instead set up their organizations as an LLC foundation.
There are a number of reasons why one may choose to to use one method of setup over the other. Before deciding which type of foundation you would like to use for your philanthropic endeavors, look into the benefits and considerations of both.
Organizations that register for the 501c3 are commonly known as charitable organizations which are used to help the general public. These organizations strictly serve the interests of the public which means no private shareholders or individual’s can benefit from the organization’s earnings. If you are open to the idea of others making charitable contributions to your foundation, you will need to setup a 501c3 foundation, otherwise their gifts will not be considered tax-deductible.
The 501c3 is what many nonprofit organizations strive to adhere to in order to be tax-exempt. This is one of the major benefits of registering as a foundation rather than a LLC Benefits related to tax-exemption include:
Those that choose to register as a private foundation should also keep in mind that there are strict guidelines in order to keep their tax-exempt status. Organizations that are registered as a 501c3 tax-exempt organization need to do the following to maintain their status:
For more requirements that 501c3 organizations must follow, reference the IRS website on exemption requirements. Contact us if you would like more information on filing for 501C3 status.
Limited Liability Company
A limited liability company operates more within a business structure. This means that there are roles like managers or directors within the organization, flexibility due to less rigid requirements, and limited liability meaning members are not held liable for a company’s debts.
This vehicle of charitable giving comes with a number of advantages. Many philanthropists have begun seeing this as an ideal opportunity for gift giving because it offers them much more control and freedom than the traditional route. Benefits of a charitable LLC include:
Overall, the LLC model avoids many of the restrictions that would be in place for a foundation on both state and federal levels making it flexible for philanthropists to engage in activities related to giving and investing that would otherwise be prohibited. However, unlike traditional nonprofit organizations, an LLC does not give you a large tax deduction until the money is donated. In addition, any money the LLC makes is taxable.
Contact us if you would like more information on filing to start a LLC Foundation.
There are alternatives to those who are looking for a blend of both or just looking for another way to give to charitable causes.
Please be advised: Blackbird Philanthropy Advisors is not a law group. We do not offer legal advice. We provide general information to help lead you on a course of action. Blackbird Philanthropy Advisors will provide a referral to you if you wish to have additional assistance on legal matters related to your nonprofit application, entity formation, and bylaws.
As a company, you can do plenty to make your business a more appealing place to work, and you can do even more to enhance the loyalty and satisfaction of your current employees. A Harvard Business Review article emphasized the importance of “reinforcing the right reasons for staying”. Creating conditions compatible with an employees’ values for working and living can include altering the work environment, providing more recognition, or investing in training. Tackling the aspect of an employee’s offer is also a way to go about instilling company loyalty.
While salary may be an obvious factor on the mind of employees, it has been shown in recent years that offering a valuable benefits package is just as important. People like to feel appreciated, wanted, and supported, and will be more likely to remain with your company for years if they feel secure in their position. One way to help your employees to feel more secure and loyal to your company is by offering additional benefits, something many professionals will give up higher salaries to receive.
Please note, we are not a law firm or accountant firm. This is for informational purposes only. For information on tax and legal matters, we suggest consulting with an attorney or CPA who is knowledgeable about your industry and needs as an employer.
Non-Taxable Fringe Benefits
Fringe benefits are additions included in an employee’s hiring package on top of the compensation. Examples of these can include a variety of insurances, employee discounts, stock options, tuition assistance, paid lunches, fitness reimbursements, or even pet-friendly work environments. According to the IRS, any fringe benefit you provide an employee is taxable and needs to be accounted for. However, there are exclusions to this that companies can focus on to bolster an offer package and keep employees loyal, happy, and retained. These are known as non-taxable fringe benefits.
Non-taxable fringe benefits are particularly attractive to employees since these include employer-provided benefits that they won’t have to pay taxes on. Offering non-taxable fringe benefits helps your employees to keep a larger portion of their salaries while still receiving all the support they need, helping them to lead more financially secure and happy lives.
De minimis (minimal) benefits
De minimis benefits are considered tax-free because they are items or services offered by the employer that have so little value it would be difficult to account for. Under this section of IRS code, employers would be able to incorporate things such as occasional meals, snacks, and company parties, or gifts like tickets to events or holiday gifts. While these added benefits are minimal, hence the name, they make a big impact on office culture and employee morale. When paired with recognition and regular feedback, it was found that companies had 31% lower voluntary turnover than those with ineffective programs.
Dependent care assistance
Taking care of your employee’s family helps you take care of your employee. Childcare and dependent assistance ranked second on benefits that employees could not live without. Employers are able to cover the first $5,000 of dependent care assistance. This applies in a variety of situations and can cover children under the age of 13 as well as children or spouses who cannot mentally or physically care for themselves.
Building new skills or earning degrees is a benefit that can attract and keep employees. The IRS allows an employer to make up to $5,250 in tax-free contributions each year to an employee’s educational expenses. This could mean covering tuition, class fees, or learning materials like textbooks. The way the funds are distributed is up to the employer, for example, you could give employees money in advance to cover classes, give employees money as reimbursement after classes are completed with passing grades, or split the money by giving them half the funds to start with and the remainder after successfully completing classes.
To keep these benefits non-taxable, these funds are only for the employee to further their own skills or in education only for work. This means it doesn’t cover family members. While it can’t cover the children of your employee’s high school education, it can be used to help your employee achieve their own diplomas. In addition, educational assistance can also be used retroactively to pay off loans that employees may have taken out in the past for school. This can be done by adding money to each paycheck that is used specifically for student loan debts.
Employee wellness happens outside of the workplace as much as it does in the workplace. Access to exercise benefits ranked in the top 15 most popular benefits desired by employees. Unum, a benefits provider, found that a third of employees desired company-paid gym memberships or access to a fitness center on the job site. While paying for memberships can come out of your employee’s paycheck, building an in-office gym is a non-taxable option that companies can look into to boost their appeal. In-office perks come at no cost to employees but are shown to be desired by almost 80% of employees when looking at job benefits they want.
Partnering with other companies and service providers to offer discounts to retailers, hotels, amusement parks, etc. is enticing to include in an hiring package. These discounts can range up to 20% off and may apply to discounted Disney World tickets or contribute to their next Apple shopping trip. A study found that more than a third of employees who didn’t already have company discounts wanted it. Employee discount programs can go a long way and it is easier for companies to take on these low cost-per-employee fees to curate discounts that their work staff will be interested in.
A complete list of other benefits excluded from income taxes includes:
There are other benefits you should take into consideration if your goal is to create a world-class, competitive workplace that fosters growth and loyalty and allows you to recruit the most talents and qualified team possible.
Please note, we are not a law firm or accountant firm. This is for informational purposes only. For information on tax and legal matters, we suggest consulting with an attorney or CPA who is knowledgeable about your industry and needs as an employer.
Learn more about how you can support your employees and help them lead happier, healthier, more prosperous lives by visiting Blackbird Philanthropy Advisors online today and checking out our blog!
Independent Sector is the only national membership organization that brings together the charitable community—a diverse set of nonprofits, foundations, and corporations—to advance the common good. The charitable sector provides millions of people with powerful, independent, and voluntary methods for addressing the issues and expressing the values most important to them.
Small Nonprofits (Fewer than 500 Employees)
Large Nonprofits (More than 500 Employees)
As nonprofit leaders, you’re facing unprecedented times in managing your workforce while also trying to maintain the level of quality in community services you’ve provided before the COVID19 crisis.
Last Friday, the $2 trillion federal stimulus package "CARES Act" passed that could offer direct relief for your organization.
I am writing to provide a summary for you of strategic options to consider as you wade through the health and economic crisis.
Under the CARES Act, unemployment benefits are confirmed upon application AND benefits are upped an additional $600/week (bringing total benefit to $800-$900/wk).
If you think it’s inevitable that you may eventually have to lay off workers soon, it might make more sense to lay off your staff immediately to unlock this program's benefits. Do the math, see if this makes sense for your team members and your operations. This program is here to help you get through this.
The CARES Act also provides up to $10,000 advance for payroll expenditures (this is called an Emergency Economic Injury Disaster Loan, approved within three days of application). If you then plan to “rehire” May 1, you could use this loan to help get you through the month of May. Then by June, it’s likely (fingers crossed) the quarantine will be over and you can fully re-open to meet client needs. This is really more like a grant, it does not need to be repaid.
This route might be able to get you through at least one month of payroll and then some payroll relief for the month of May. Something to talk to your financial advisors about, every organization is unique and requires a unique strategy.
ADDITIONAL CARES ACT BENEFITS FOR NONPROFITS
If you haven’t done so already, reach out to your legal and financial counsel as soon as you can to determine what the best options are for your organization. In Indiana, we recommend Kruggel Lawton CPAs (Margene Zink mzink[@]klcpas.com) for accounting information and South Bank Legal for legal matters. Elsewhere, let me know if you’re looking and I will get you a good referral.
I am not a lawyer or a CPA. I am offering ancillary support as a nonprofit administration consultant who wants to see your important organization get through this whole and on your feet.
Feel free to reach out using our contact form if you have specific questions or need assistance during this tough period.
The closer details of charitable deductions on taxes only matter if a person is itemizing deductions on their tax filings. If so, you are able to deduct contributions up to 50% of your adjusted gross income when they are made to qualifying 501(c3) entity or other qualifying organization. Some organization types only qualify for a 30% limitation private foundations, others qualify for a 60% limitation (federal government units).
If you’re concerned with the tax-deductible status of your donations, you may request verification from the charity of your choice (ask to see a copy of their latest IRS 990 or a copy of their IRS 501(c)3 determination letter). You can also use irs.gov or guidestar.org to search for documentation.
What can and can’t be deducted?
In order for a donation to be deducted, it needs to be truly charitable. No goods or services can be received in exchange for the donation that is considered tax-deductible.
If you attend a charity dinner and paid $500 for your ticket, you’ll need to find out how much was spent on the meal and beverages you received because you are only allowed to deduct the amount that exceeds the cost of your event attendance. Similarly, charity concerts, golf outings, and auctions are all types of events when your full donation amount may not count toward your charitable donation. You may pay $500 to play in a charity golf outing but find out that the charity spent $300 per player for gifts and greens fees. In this case, you would only be able to deduct $200, not the entire $500 you spent.
It is up to you and your accountant to determine this amount by coordinating with the charity. If the charity is doing their job correctly, they will make it easy for you by adding it to the gift acknowledgement. For example, it should read: “$100 contributed. $60 total deductible donation after receipt of goods and services.”
Do people need to keep track of receipts?
Everyone should keep careful track of charitable contribution receipts, just as they would any other household or business expenses. Most nonprofits have a donor database system to keep records on gifts though and should be able to print you a new one should you lose yours. Some nonprofits will mail out a statement of giving around January or February each year which will include a complete history of your giving for the year – this document can be used for accounting purposes in place of the receipts of each individual gift you made to them that year.
Blackbird Philanthropy Advisors Featured in Cheapism Article on "How to Get Tax Breaks Through Charitable Donations"
GET TO GIVING
As the clock winds down on 2018, many people are scurrying to make their final charitable donations of the year and tally up ones already made. In 2017, Americans gave $410 billion to charities, an increase of five percent over the previous year. For those looking for ways to make the most of charitable donations before the end of the tax year, here are some tips and insights from experts around the country.
KNOW THE NEW TAX LAWS
Under the new tax laws recently adopted, the standard deduction for filers has roughly doubled. It’s now $12,000 for single filers, $18,000 for head of household, and $24,000 for joint filers. Those increases will likely have a profound impact on people’s interest in making charitable donations. “If you’re taking the standard deductions, you cannot itemize,” explains Mark Charnet, founder and CEO of American Prosperity Group. “That’s going to horribly dissuade people from making charitable donations. Unless they itemize on their taxes, they will not get a reduction on their tax bill for the charitable contributions and therefore will be disincentivized to make donations.”
KNOW HOW MUCH YOU CAN DEDUCT
The law generally allows for deducting contributions up to 50 percent of your adjusted gross income, when such contributions are made to qualifying 501 (c)(3) entity or other qualifying organization, explains Caitlin Worm of Blackbird Philanthropy Advisors in South Bend, Indiana. “Some organization types only qualify for a 30% limitation, such as private foundations, while others qualify for a 60% limitation, such as federal government units,” says Worm.
RESEARCH WHERE YOUR MONEY WILL GO
If you’re planning to donate to a non-profit organization, otherwise known as a 501(c)(3), find out how your contribution will be used. How much will go toward the cause and how much goes toward administration? A variety of third-party evaluation and ratings sites can help with this effort, such as the Better Business Bureau’s Wise Giving Alliance, Charity Navigator, and Charity Watch, which review a charity’s finances, governance and effectiveness. “Better ratings will indicate that the organization allows for the majority of the donations to go right to the cause,” says Jacob Dayan of Community Tax.
Many people wonder if their volunteer time at a charity completing professional tasks can be deducted on their taxes. You cannot deduct the value of services rendered in volunteer service to a nonprofit. You can, however, deduct the expenses you incurred while volunteering or traveling to and from the volunteer assignment.
Example 1 - The Artist:
An artist who paints a mural on the wall of her local local Boys & Girls Club can deduct the cost of paint, paint brushes, and other supplies needed to complete the mural. She can also deduct the gas mileage it took to get to and from the charity to complete the volunteer service. She cannot deduct for the time it spent her.
Example 2 - The Nurse:
A Red Cross volunteer who is a Registered Nurse travels to Florida to help with hurricane disaster relief recovery. He can save the receipts for his airfare, lodging, and meals while on assignment. He cannot calculate the hours he spent working as a nurse for Red Cross and deduct the pay he would have been paid in his workplace.
Always consult with your tax advisor to be certain.
Many people wonder if it makes sense to donate property, cars, or other valuable items to charities in order to receive a tax donation.
Nonprofits are chronically short on cash and always in pursuit of seeking full sustainability. Of course, most charities will accept donations of all kinds but sometimes donations can be more of a hassle than the net benefit. There are horror stories of benefactors donating property, jewelry, art, or cars to a nonprofit where it took more staff time to sell and manage the goods than they received in net contributions. Make sure your donation will be an easy and manageable transaction.
If a charity uses your property, car, art, or valuable items to carry out their programs and services, you may be able to deduct the full “Fair Market Value.” However, you may need an official, written appraisal. If the property, cars, or valuable items are worth more than $5,000 you will need a written appraisal from a qualified appraiser.
On the other hand, if the charity sells your property, car, or valuable items for less than your appraised value, you may only deduct the amount the item was sold for, not the pre-determined market value. Example: If you donate a car to Boys & Girls Club for the estimated value of $3,500 in August but they were only able to sell it for $3,000 in December – then you can only deduct the final sale value of $3,000.
Veer over to the IRS website to learn more before making your big donation:
A Donor's Guide to Donating a Car
Determining the Value of Donated Property
Feel free to reach out to us if you have additional questions or need us to translate some of the IRS technical language. We're also happy to review your pledge and give you guidance on the best course of action.