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July 2, 2014

Streamlined Application for Tax Exempt Organizations

iStock_000018610908Small.jpgAs anticipated, the Internal Revenue Service announced a streamlined, much simpler and shorter version of Form 1023, the Application for Recognition of Tax Exempt Status.

Standard Form 1023

The standard Form 1023 is 26 pages long, not counting a 38-page instruction booklet, 3 additional pages of instructions the IRS has added to the front of the form making changes to the form and the instructions, and a 2-page checklist to make sure the entire submission package is complete and compiled in the correct order. But that's not all -- one of the most important sections of the form, Part IV, is only about a quarter-page long but it calls for the applicant to attach a detailed narrative description of the organization's activities explaining how each of them supports the organization's charitable purpose, and several other sections leave so little room to include all the necessary information that most applicants find it necessary to attach addtional pages. With all that, and with the other information that must be submitted, such as articles of incorporation and bylaws, Form 1023 submission packages can easily reach 50, 60, or 70 pages.

The IRS says that they currently have a nine-month backlog of Form 1023 applications, and it is possible that number is actually an understatement. Once received by the IRS, Form 1023 applications go through a sort of triage process. Applications that are complete and do not appear to pose significant obstacles to approval are directed into a queue to be processed more quickly than applications that will require the IRS to request significantly more information. Just this week our office received a determination letter for a Form 1023 that had been pending for more than seven months, and that application was, presumably, directed through the quicker process.

Form 1023-EZ

In contrast, Form 1023-EZ is less than three pages long, although that is a little misleading because it still requires an instruction booklet with 10 pages of instructions to explain how to complete the form, a 7-page worksheet that must be completed in order to determine if the organization is eligible to use the streamlined form, and a 3-page list of National Taxonomy of Exempt Entities (NTEE) Codes from which the applicant must select the code that best fits the organization. Nonetheless, Form 1023-EZ should be considerably less burdensome than the standard form.

After completing the worksheet, the applicant must file the form online at www.pay.gov, which requires a username and password obtained through free registration. Any applications submitted on paper are automatically deemed incomplete.

Eligibility

Most organizations with annual revenues less than $50,000 for the current year, each of the previous three years, and the next two projected years are eligible to submit Form 1023-EZ. However, some types of organizations must submit the standard Form 1023 regardless of revenues. Here is a partial list of organizations that are ineligible for Form 1023-EZ:


  • Those organized as limited liability companies.

  • Churches and associations or conventions of churches. (Note: Churches are not required to submit an application for recognition of tax exempt status, but if they do not, they will not have a determination letter from the IRS, which can be useful for various reasons. Those that wish to receive a determination letter will continue to submit Form 1023 rather than 1023-EZ.)Schools, colleges, and universities.

  • Hospitals, medical research organizations, and hospital organizations.

  • Health maintenance organizations (HMOs).

  • Accountable care organizations (ACOs).

  • Supporting organizations (i.e., charitable organizations that are derive their status as public charities from their supporting relationship to another charitable organization that is a public charity).

  • Credit counseling organizations.

  • Organizations that have previously had their tax exempt status revoked except organizations that have had their tax exempt status revoked for failing to file Form 990 (or 990-EZ or 990-N) for three consecutive years.


That last part is significant because many smaller organizations have lost their tax exempt status for failure to file Form 990, and Form 1023-EZ will be available to those wishing to have their tax exempt status reinstated.

Continue reading "Streamlined Application for Tax Exempt Organizations" »

March 25, 2014

The Difference Between Tax Status and Legal Form of a Business or Nonprofit

iStock_000005953904Small.jpgI just read a report by the Small Business Administation that includes a wealth of statistics and other information about small businesses in the United States. As useful as the report is, it contains a mistake that, although commonly made, one would not expect from the SBA. The last item in the report asks the question, "What legal form are small businesses?" That's a good question, but the SBA didn't answer it. Instead, it answered another question, "What is the tax status of small business?" Even though the two questions are related, they are nonetheless distinct, and answering the second question does not answer the first.

Legal Form of a Business or Nonprofit

As we've discussed before, businesses are commonly organized according to one of a handful of legal forms: sole proprietorships, general partnerships, corporations, and limitied liability companies. There are a few others used less frequently, including limited partnerships, limited liability partnerships, and professional corporations. Tax exempt organizations are commonly organized as nonprofit corporations, but they can also be organized as unincorporated associations, charitable trusts, and sometimes limited liability companies.

The legal form of a business or tax exempt organization is primarily related to two fundamental attributes: who controls the organization, and who is liable for the organization's obligations. For example, if a business is structured as a general partnership, the partners collectively control the business and the partners are individually liable for the obligations of the partnership. In contrast, if a business is structured as a corporation, it is probably controlled by a board of directors, elected by the shareholders and acting through the officers. Unless something goes wrong, neither the shareholders, the directors, nor the officers are liable for the corporaton's obligations.

Tax Categories

Although selecting the legal form of an organization determines the attributes of control and liability, it does not determine how much income tax the organization must pay. There are four common possibilities of tax status for businesses and nonprofit organizations, categorized by the applicable subchapter of Chapter 1 of Subtitle A of Title 26 of the United States Code (also known as the Internal Revenue Code): Subchapter C (the default provisions for corporations), Subchapter S (which is an alternative to Subchapter C that can be elected by small business corporations that meet the eligibility criteria), Subchapter K (for partnerships), and Subchapter F (for tax exempt organizations). Finally, some types of legal forms that have a single owner, such as sole proprietorships, are diregarded for income tax purposes, with their income reported on the owner's income tax return. Those businesses or nonprofit organizations are known as, appropriately enough, "disregarded entities."

Each of these tax categories can apply to more than one type of legal form of organization, and with two exceptions (sole proprietorships and general partnerships), each legal form has more than one possibility for the tax category, as shown in the chargt below. Even nonprofit corporations have more than one possibility; while most nonprofit corporations are organized with the intent of qualifying for Subchapter F (exempt organizations), if a nonprofit corporation fails to meet the criteria for tax exemption, it will be subject to taxation under Subchapter C.

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Now you won't make the same mistake that the SBA made.


Continue reading "The Difference Between Tax Status and Legal Form of a Business or Nonprofit" »

February 20, 2014

New Reporting Requirement for Businesses and Nonprofits -- Change in responsible party

Reports.jpgThe Internal Revenue Service's application for an employer identification number (or EIN) requires the applicant to submit the name and tax identification number (usually a social security number) of the applicant's "responsible party." That is true whether the application, Form SS-4, is submitted on paper or online, and it is true for any type of organization applying for an EIN, including corporations, limited liability companies, partnerships, trusts, and tax exempt organizations. That is the last time most organizations ever think about the "responsible party." Until now.

On May 6, 2013, the Internal Revenue Service published a final rule that requires any business, nonprofit organization, trust, or other entity with an EIN to report any change in the entity's responsible party. Here are the answers to some questions that essentially every business and tax exempt organization should know.

Who is a "responsible party"?

The answer differs a bit for various types of organizations. For companies with shares traded on a public exchange or securities registered with the U.S. Securities Exchange Commission, the responsible party is defined fairly unambiguously:

For corporations, the responsible party is the principal officer. For partnerships, the responsible party is a general partner. For trusts, the responsible part is the trustee, grantor, or owner. For disregarded entities, the responsible party is the owner.

For other entities, the definition is more ambiguous:

The responsible party is "the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets."

For business corporations, the responsible party may be the president or chairman of the board; for LLCs, a member; for partnerships (including limited partnerships, such as family limited partnerships), a general partner.

The issue of identifying a responsible party for a nonprofit organization may be particularly problematic because, in many organizations, no single person who has the authority to control, manage, or direct the organization and -- in particular -- to control the disposition of its funds and assets. In fact, we often tell the boards of directors of our nonprofit clients that, collectively, they have full authority to control the organization but, individually, they have no authority at all. Even so, the IRS requires the designation of a responsible party, and the organization must decide who best fits the definition. For some organizations, that may be the executive director or CEO; for others, it may be the president or chairman of the board.

Our LLC has three members, all with the same rights and authority. Who is the responsible party?

If more than one person qualifies as a responsible party, the entity must select one of them by whatever criteria the entity chooses.

When and how must changes be reported?

As of January 1, 2014, any change in an entity's responsible party must be reported on IRS Form 8822-B within 60 days after the change takes effect. Changes made prior to January 1, 2014 must be reported before March 1, 2014.

Our organization obtained an EIN years ago, and we have no idea who was listed as the responsible party. But Form 8822-B requires us to list not only the new responsible party, but also the old one. What do we do with that?

The best course is probably to submit Form 8822-B without the information about the old responsible party and attach a statement explaining what you have done to locate the information and why it is unavailable despite those efforts. [Revised February 21, 2014, to include the idea of attaching a statement -- a suggestion from James W. Foltz, Attorney at Law, of Indianapolis, Indiana.]

Our nonprofit has filed Form 990 (or 990-EZ or 990-N) every year, and we always have to list the organization's principal officer. Isn't that good enough?

From what we know at the moment, probably not. Even if the responsible party and the principal officer are the same person, Form 8822-B calls for the responsible party's social security number, but Form 990 does not. The same thing is true for the tax matters partner identified on Form 1065 filed by partnerships and by LLCs taxed as partnerships.

I called the IRS and tried to get some more specific information about the new reporting requirement, and the person I spoke with had never heard of this new requirement. Are you sure about it?

We had the same experience, but, yes, we're sure. We hope the IRS will issue guidance that clarifies some of the details, but we're sure the rule is in effect.

What happens if we do not file Form 8822-B or file it late?

That's the good news. As far as we can tell, there is no penalty for failing to file or for filing late. Even so, everyone with an EIN, including small businesses and tax exempt organizations, should comply with the rule using the best understanding of the requirement and the best information available.

Continue reading "New Reporting Requirement for Businesses and Nonprofits -- Change in responsible party" »

February 11, 2014

The 2014 IRS Mileage Rates

Odometer.jpgIf you use a vehicle for business, medical, or moving purposes, or in providing volunteer services to a charitable organization, you may be able to deduct at least a portion of the cost on your income tax return. There are two alternatives for calculating the amount of the deduction, but the simplest is to keep track of the number of miles driven and multiply by the appropriate standard IRS mileage rate.

The standard mileage rates are based on an annual study of the costs of operating a motor vehicle, conducted by the IRS and an independent contractor. The information used in deriving the standard rate for business purposes include both fixed and variable automobile costs, such as insurance, fuel, maintenance, and repair costs. Only variable costs are considered in calculating the standard rate for medical and moving purposes. The charitable rate is fixed by statute.

What are the rates?

On December 6, 2013, the IRS announced the standard mileage rates for 2014. The rates as of January 1, 2014, are:

• 56 cents/mile for business miles driven for business purposes
• 23.5 cents/mile for miles driven for a medical purpose or a moving purpose
• 14 cents/mile for miles driven as a volunteer to a charitable organization.

These rates apply to the use of automobiles, including includes cars, vans, pickups, and panel trucks. With fuel prices generally decreasing, the standard rates miles driven in 2014 for business, medical, and moving expenses are one-half cent below the rates for miles driven in 2013. The charitable rate is the same in 2014 as it was in 2013.

What counts as "Business" miles?

While commuting to and from work does not count toward business mileage, there are many trips that may be characterized as business trips for purposes of calculating mileage, including driving to meet a client, driving to a bank to making a business transaction, driving to pick up mail from the post office, and driving to a supply store to make purchases for your business.

Of course it is easy to forget to keep track of your miles driven, but if you are disciplined about it, the savings can add up. For example, if you are in the 28% tax bracket, the deduction for 100 business miles may reduce your federal income tax by about $15.00.

Other considerations:

As mentioned above, the use of standard mileage rates is not the only alternative for calculating the deduction for the use of a vehicle. Taxpayers may instead calculate the actual costs of using their vehicle, including costs of gas, oil, registration fees, repairs, tires, and insurance. However, calculating the actual costs of using a vehicle for taxation purposes of often takes more time and effort. Broadly speaking, the more economical the vehicle is, the more likely that the standard mileage rate will give you a better deduction. Conversely, if the operating costs of a vehicle are high, the more likely the actual cost method will give you a better deduction.

If a taxpayer uses the depreciation method under the Modified Accelerated Cost Recovery System (MACRS), or claims a Section 179 deduction for a vehicle, she may not use the mileage rates. Additionally, the standard rate for business purposes cannot be used for more than four vehicles simultaneously.

November 23, 2012

Hiring soon? Consider an Unemployed Veteran!

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Businesses and nonprofit organizations that have recently hired unemployed veterans and those that do so before 2013 may be eligible for a tax credit of as much as $9,600 for each unemployed veteran hired by a business or as much as $6,240 for each unemployed veteran hired by a qualified tax exempt organization. Qualifying businesses will receive a credit against income tax, and qualifying tax exempt organizations will receive a credit against the employer's share of Social Security tax.

The tax credit is a result of the bipartisan VOW to Hire Heroes Act of 2011, unanimously passed by both houses of Congress and signed by the President on November 21, 2011, which expanded the Work Opportunity Tax Credit (or "WOTC") to include certain classes of unemployed veterans. The amount of credit available depends on the length of time the veteran was unemployed before being hired, the number of hours the veteran works, the amount the veteran is paid in the first year of employment, and whether the veteran has a service-related disability.

Critical Deadlines

Businesses and tax exempt organizations that wish to take advantage of the tax credit need to be aware of two critical deadlines. You will not get the tax credit if you fail to meet either one:


  • First, the expanded tax credit expires at the end of the year. The veteran must start work on or before December 31, 2012.

  • Second, the employer must file certain forms within 28 days after the veteran starts work. (Other rules were in place for veterans hired before May 22, 2012.) Different forms are required for businesses and for tax exempt organizations. The process of for claiming the credit, including a list of the required forms, is summarized here.

The IRS has provided several other sources of information on the WOTC for veterans, including a list of frequently asked questions and a detailed description of the WOTC. You should also consult your tax advisor.

Continue reading "Hiring soon? Consider an Unemployed Veteran!" »

November 21, 2012

IRS Standard Mileage Rates Will Increase in 2013

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The Internal Revenue Service has announced the following standard mileage rates used to calculate income tax deductions for business travel expenses and for travel expenses incurred while serving charitable organizations.

  • Business, $0.565 per mile
  • Charitable service, $0.14 per mile

These rates, which are one cent per mile higher than the standard rates for 2012, take effect on January 1, 2013.

Continue reading "IRS Standard Mileage Rates Will Increase in 2013" »

April 23, 2011

Form 1099 Reporting Changes Repealed

iStock_000001958827XSmall.jpgLast November I wrote about a new law that expanded the requirement to issue Form 1099 to include reporting of payments made to corporations and to suppliers of goods. The law was set to go into effect for payments made in 2012. In January I wrote that Representative Dan Lungren (R. California) had introduced a bill to repeal the new requirement. On April 14, President Obama signed Congressman Lungren's bill into law, eliminating the expansion of the reporting requirements.

March 7, 2011

Just what IS a limited liability company? Part 7. It's a bundle of tax choices.

[This is the last of a seven-part series of posts discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here's the entire list.

Part 1. Background on sole proprietorships.
Part 2. Background on partnerships.
Part 3. Background on corporations.
Part 4. LLCs are distinct legal entities, separate from their owners.
Part 5. A limited liability company's owners are not liable for the LLC's obligations.
Part 6. Options for an LLC's management structure.
Part 7. Options for an LLC's tax treatment.]

iStock_000007266907XSmall.jpgIn prior posts, I've discussed several characteristics of LLCs. First, like corporations, LLCs are entities separate from their owners. Second, also like corporations, the owners are not liable for the obliigations of the LLC. Third, they offer choices of management structures: They can be managed directly by the owners, like sole proprietorships and many partnerships, or they can be managed by others who are selected by the owners, in much the same way that shareholders of a corporation elect directors to run the business. This last post of the series looks at the tax characteristics of LLCs.

Interestingly, LLCs do not have a specific category in the Internal Revenue Code or the Tax Regulations. Instead, their tax treatment is governed by the so-called "check-the-box regulation." It provides that the LLC may elect to be treated in one of several ways, and the choices depend on whether the LLC has one member or more than one member.

The default status for a single-member LLC is that it is a "disregarded entity" in that all the income and expenses go directly on the member's personal tax return, just like a sole proprietorship. The LLC itself doesn't even have to file a tax return. The default status for a multi-member LLC is to be taxed as if it were a partnership. Alternatively, either a single-member LLC or a multi-member LLC can elect to be taxed as if it were a corporation, either as a Subchapter C corporation or, if the LLC meets certain criteria, as a Subchapter S corporation. To decide which is the best tax strategy for your LLC, you should consult both your lawyer and your accountant.

Continue reading "Just what IS a limited liability company? Part 7. It's a bundle of tax choices." »

January 7, 2011

Important Update on 1099 Form Reporting Changes...Could they be Repealed?

918333_u_s__capitol_building.jpgAs discussed in my post of November 24, businesses and nonprofit organizations face a significant increase in the requirements to issue 1099 forms beginning with payments made after December 31, 2011. However, a lot could change between now and then. Several legislators introduced bills during the previous session of Congress that would have dramatically reduced the new reporting requirements or even repealed them altogether. Although none of them passed, similar bills are being introduced again in the new session.

Representative Dan Lungren (R. California) originally introduced a repeal measure last April, just one month after the original legislation was passed, but was unable to obtain the signatures necessary for a vote on the matter. Rep. Lungren re-introduced his bill to repeal the 1099 tax provision earlier this week and plans to continue fighting against the new tax provisions. The bill, referred to as "The Small Business Paperwork Mandate Elimination Act," has 180 co-sponsors and was one of the first bills to be introduced during the 112th Congressional Session.

Other members of Congress have sought to lighten the impact of the reporting changes without repealing them altogether. Senator Mary Landrieu (D. Louisiana) introduced a bill last September that would increase the reporting threshold from $600 to $5,000. Senator Landrieu has yet to re-introduce the bill, but it is likely that similar efforts will begin to surface in the new Congress.

Many organizations representing small business owners have also shown great concern about these changes, which increases the possibility of amendments or a total repeal before next year. Continue checking back here for updates on the 1099 reporting requirements and how they will affect your small business or non-profit organization.

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December 4, 2010

The credit card exception to the 1099 filing requirement changes may ease the burden for many small businesses and non-profit organizations

206549_credit_card__gold_and_platinum.jpgThe recent changes to the filing requirements for 1099 forms may turn out to be quite a hassle for many business owners beginning with payments made in 2012. Having to file a 1099 for each entity a small business or non-profit organization pays more than $600 in a calendar year has the potential to be time-consuming and confusing. Thankfully, the Internal Revenue Service (IRS) has decided to allow an exception for all payments made with credit cards. Any time a small business or non-profit organization uses a credit card to make a purchase, that transaction will NOT require a 1099 form. This exception stems from the fact that credit card companies are required to report transactions to the IRS, so there is no need for double-reporting.

For those businesses that do not already use a credit card for their purchases, now would be a great time to consider applying for one. Not only will all transactions made with a credit card be exempt from 1099 reporting, credit cards are also great tools for organization. It is much easier to keep accurate business records when you have an itemized credit card bill that shows exactly what you spent and where you spent it. Obviously, there are some purchases that cannot be made using a credit card. For those transactions, businesses will need to be sure and obtain the Tax Identification Number (TIN) for the person or company they are paying.

In addition, if you're a business owner and you don't already accept credit cards, now might be a good time to start. Your customers may thank you at tax time!

While these changes do not take effect until January 2012, it is still crucial that small businesses and non-profit organizations begin thinking about these new changes. Hopefully, the exception for credit cards will lighten the load for many businesses and make compliance easier and less time-consuming.

**Please note this entry has been amended to reflect that the changes to the 1099 form filing requirements take effect in 2012 for 1099 forms issued in 2013.**

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November 24, 2010

How will the upcoming changes to the filing requirements for 1099 forms affect your small business or non-profit organization?

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Click here for an update to this post.

Congress recently passed legislation that will dramatically change the filing requirements for 1099 forms beginning in early 2013 for payments made in 2012. Under the new rule, small businesses and non-profit organizations will be required to file 1099 forms with the Internal Revenue Service (IRS) for goods as well as services. The new legislation also requires that 1099 forms be filed for transactions with corporations, while currently reporting is only required for expenditures made to non-corporate entities. It is clear at this point that these changes will greatly affect the way many businesses operate on a day-to-day basis.

The new rule will require all small businesses and non-profit organizations to file a 1099 form with the IRS for every entity they pay $600 or more for goods in a calendar year. That means that even the smallest of businesses will likely be filing many more 1099 forms than they have in the past. It is not difficult to imagine how even minor purchases with a single vendor can add up to over $600 in a year. For example, even spending only $50 a month on lunch for employees or for flowers to decorate the office would add up to $600+ over a year. In order to properly and completely fill out their 1099 forms, businesses will also need to provide the Taxpayer Identification Number of each company or individual they report.

To minimize extra burden in the future, small businesses and non-profit organizations should begin tracking their spending more efficiently now. Obtaining the correct Taxpayer Identification Numbers for each of their payees and recording ALL payments, large and small, made to both corporate and non-corporate entities will reduce headaches in 2012. A future article will explain the exception for payments made with credit cards.

**Please note that this entry has been amended to reflect that the 1099 filing changes take effect for payments that are made beginning in 2012 for 1099 forms issued in 2013, NOT for payments made in 2011.**

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November 16, 2010

What is a 1099 form and how does it apply to your small business or non-profit organization?

369109_taxpapers.jpgOften referred to as an "information return," a 1099 form is a tax document that businesses are required to file with the Internal Revenue Service (IRS) to report certain business expenditures. 1099 forms must be filed by all businesses and non-profit organizations, regardless of their size and yearly revenue. Currently, the threshold for reporting is limited to expenditures for services to a single non-corporate entity that total $600 or more in a calendar year. The $600 amount includes not only single transactions with a service provider, but also recurring transactions with a single entity that add up throughout the year.

Businesses and non-profit organizations must file a separate form for each service provider to whom they pay $600 or more. The IRS website provides a list of some of the services for which a 1099 form is required and which specific version of the 1099 must be filed for that particular service. After filling out the correct 1099 form and filing it with the IRS, a business is also required to send a copy of the completed form to the service provider or "payee." Given that $600 is a fairly low threshold, some businesses file hundreds of 1099 forms each year. Businesses are allowed to submit up to 249 information returns each year on paper, but all businesses who file 250 or more must do so electronically.

Due to recent legislation, the filing requirements will expand in 2012 to include corporate payees and transactions for goods as well as services. Stay tuned for more information on these changes and how they will affect your small business or non-profit organization.

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