Since navigating the complexities of tax laws is not easy, working with an accountant can be a good first step. There are common pitfalls that carry serious consequences if not addressed. A review of the basics can help your nonprofit organization avoid them.
Not everyone at your nonprofit needs to become an expert on charitable contribution tax rules. However, it is helpful if key people on your staff — particularly those involved in fundraising efforts — understand the basic charitable deduction rules.
IRS rules make certain types of donations easier or more advantageous than others. Your fundraising strategies should always take the tax effect of a donation into consideration. Use fundraising letters and other communications to educate potential donors on the tax benefits of particular types of donations.
To make sure that your donors understand current IRS requirements for donations, it can be beneficial to post basic information on your website.
If your nonprofit provided any goods or services in exchange for a donation —a tote bag, a meal, or a fruit basket for winning a silent auction–you may want to remind them that their tax deduction is limited to the excess of the contribution over the fair market value (FMV) of the item received in exchange for the donation. In “thank you letters, it’s a good idea to include the following reminder for donors: Please keep this written acknowledgment of your donation for your tax records.
All tax-exempt organizations must file certain reports with federal, state and local authorities. In the State of Connecticut, charitable organizations are required to file with the Department of Consumer Protection Public Charities Unit. To comply with this filing, organizations with gross revenue (not including government grants) in excess of $500,000 must include audited financial statements. Organizations that receive Federal or State awards may also be subject to additional single audit requirements.
Many Organizations receive contributions that are restricted by donors. Restricted contribution amounts are reported on a nonprofit’s tax return. Organizations are responsible for using the funds in accordance with the donor’s restricted intent.
Nonprofits are required to itemize expenses across general, administrative, fundraising, and program areas. These are called functional expenses, and the IRS requires you to report them.
Direct costs are expenses that can be identified specifically with an organization’s activity or project. They can be assigned to an activity or project with a high degree of accuracy. Indirect costs are costs that cannot be identified specifically with an activity or project. Organizations are responsible for reasonably allocating these indirect costs to report amounts accurately and document the method of allocation in their records.
Failure to file the right forms, depending on the type and size of the organization, can lead to severe penalties.
It’s important to retain tax-exempt status so that contributions made by donors continue to be tax deductible. To keep tax-exempt status, various reporting documents must be filed on an annual basis. The IRS is vigilant in observing these rules. Indeed, in 2011, about 500,000 organizations had their tax-exempt status automatically revoked for failing to file required reporting documents for three years in a row.
While nonprofits are exempt from income taxes, they are still required to pay certain taxes such as payroll taxes. Typically, payroll taxes are withheld from employee paychecks and deposited by the organization with the proper federal, state, or local taxing authority.
Also, the organization may need to collect and remit sales tax if taxable goods and services are sold. Sales tax filing responsibilities differ by state and can be complex.
Working with an accountant is important to ensure that your nonprofit organization is fling the proper and necessary paperwork.
If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.
