Tag Archive for: taxes

Discovering The Tax Implications of Nonprofits Owning For-Profit Businesses

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Does your nonprofit have ownership of a for-profit entity? Whether your organization owns a for-profit company outright or has limited ownership, a for-profit subsidiary can have serious tax implications for your nonprofit.

Let’s work through some of the most pressing tax implications you might face as a nonprofit with ownership in a for-profit company.

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Tax Implications of Nonprofits Owning For-Profit Businesses

Unrelated Business Income Tax (UBIT)

Recognized nonprofits generally receive tax-exempt status from the federal government. Tax-exempt status makes it easier for your organization to retain nonprofit revenue and meet the goals of your mission.

However, your nonprofit may engage in revenue-generating activities that don’t relate to the purpose of your organization. The money that comes from these activities is known as unrelated business income because it’s earned from activities that are unrelated to your exempt mission.

The IRS can potentially charge your organization federal income taxes on your unrelated earnings. Known as unrelated business income tax (UBIT), you may face this tax liability if your nonprofit regularly carries on a trade or business that doesn’t substantially relate to your exempt mission or purpose.

UBIT Exclusions and Exceptions

Not all unrelated business income is subject to federal income tax. The IRS provides UBIT exceptions and exclusions to account for situations where a nonprofit uses for-profit activities to advance its exempt purpose.

Common nonprofit income that could be excluded from UBIT includes:

  • Dividends and Other Investment Income
  • Interest Earnings
  • Royalties
  • Certain Rental Income
  • Gains or Losses from the Disposition of Property

Additionally, income generated using a majority volunteer labor force may qualify for an exception. For example, hosting a fundraising auction operated by volunteers may not require UBIT payment.

Tax On Excess Business Holdings

The IRS uses taxes on excess business holdings to limit how much ownership a nonprofit can have in a for-profit company without paying federal taxes. Taxing excess business holdings helps reduce conflicts of interest and limits the power a tax-exempt entity has over a business.

Excess business holdings are shares or interests a nonprofit holds in a for-profit company that exceeds the IRS’s limits. Generally, any ownership share over 20% of voting stock in a company is considered an excess business holding. Nonprofits with excess holdings may face an excise tax on the value of shares over the limit.

Joint Ventures and Tax Implications

Many nonprofits partner with for-profit entities to help advance their mission with the financial backing of their partner. For example, a mental health organization might create a joint venture with a for-profit healthcare system to establish mental health facilities in underserved areas.

Depending on the nature of the joint venture, nonprofits could jeopardize their tax-exempt status if they don’t follow certain limitations, including:

  • The joint venture must seek to further the nonprofit’s charitable purpose.
  • Any benefits to the for-profit entity must be insubstantial compared to the public benefit of the partnership.
  • The nonprofit must have control over the charitable activities of the venture.

You may want to work with a nonprofit financial advisor or accountant to set up a joint venture with a for-profit entity. Your advisor can help you avoid pitfalls that could affect your tax-exempt status.

Impact on Charitable Contributions

Donors to nonprofits often receive tax benefits for their charitable giving. In most cases, a donor may be able to deduct certain charitable donations from their taxes. Many donors use nonprofit donations to lower their taxable income for the year.

Giving money to a nonprofit with for-profit business ownership could limit the donor’s ability to deduct donations, however. If your nonprofit engages in for-profit activities, you’ll need to communicate with donors to let them know. Proper communication helps donors understand the tax implications of their gifts and improves your organization’s transparency.

Maintaining Separate Accounting

Any nonprofit with for-profit ownership needs to maintain separate accounting for each area of business. This includes keeping separate financial statements, revenue records, and bank accounts.

Separating business activity is essential for maintaining accurate records of income, expenses, and activities associated with each business. Properly-recorded books can help reduce your chance of noncompliance in a nonprofit audit.

State Tax Considerations

The tax implications we’ve already covered mostly relate to federal tax-exempt status.

However, state tax agencies may also have rules for nonprofits that operate for-profit businesses. You’ll need to check your state’s tax laws and regulations to see how they might affect your organization.

Seek Professional Guidance for More on the Tax Implications of Nonprofits Owning For-Profit Businesses

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Few parts of nonprofit accounting are as complicated as a nonprofit owning a for-profit business. Your organization may be liable for certain taxes on excess business holdings or income from unrelated business activities. In some cases, operating a for-profit entity could put your nonprofit at risk of losing its tax-exempt status.

Nonprofit leaders like you don’t have to navigate tricky tax implications on your own. Working with a trusted nonprofit tax advisor, like The Charity CFO, gives you the resources to avoid unwanted tax implications.

Our team of dedicated nonprofit accountants and financial advisors is ready to put our specialized knowledge to work for your organization. Reach out to us today to get started!

Preparing for a Not-for-Profit Audit: Episode 3 of A Modern Nonprofit Podcast

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Do I need to hire a CPA firm for my nonprofit? Why can’t my finance person just take care of and publish my not-for-profit finance statements? Preparing for a not-for-profit audit is not something you should fear.

Plus, these are complex questions that only an expert accountant for charities can answer.  There are a lot of standards to follow in finance! Unfortunately, these standards do not get any easier when you are asking if your nonprofit should seek an audit.

Preparing for a Not-For-Profit Audit

In fact, this is why Jeanne Dee, a partner at Anders CPAs + Advisors, was this week’s speaker on Episode 3 of A Modern Nonprofit Podcast. Tosha Anderson’s latest guest dove into the specifics of what a certified public accountant does. Additionally, Jeanne discusses the differences between a review versus an audit. LISTEN TO EP. 3: PREPARING FOR A NOT-FOR-PROFIT AUDIT WITH JEANNE DEE HERE. 

Sometimes, different states have different expectations when it comes to the audit of a nonprofit. Nonprofit finances has a lot of standards that you must know! Fortunately, Jeanne highlights the types of expenses, fundings, and risk assessment process for not-for-profits. Plus, Jeanne explains the difference between procedures and policies. This distinction is important for having a good business mindset. Also, good documenting, risk assessment, and succession plans are points that auditors will want to consider.

So, why do nonprofits need to have an audit? Sometimes, an audit is required. Other times, an audit can be a valuable tool to understand the qualitative aspects of an organization. An audit will help you dig deeper! You can become a stronger charity because of it. This consideration is discussed later in Episode 3. Further, the two leaders discuss common mistakes and nonprofit fundraising, too. It’s a great discussion you don’t want to miss!

Prepare for Your Charity’s Audit

Plus, there are many benefits to having an audit. So, if you are looking for a nonprofit certified public accountant, The Charity CFO’s team of expert accountants are ready to help you work through your books. Schedule a free strategy session with us today if your auditors have started asking for spreadsheets. Or, if you are ready to take control of your nonprofit bookkeeping, we are here to help.

Lastly, if you would like to learn more about internal and external accounts with respect to the different industries, check out Jeanne Dee’s information.

The conversation doesn’t end here. Join A Modern Nonprofit Facebook Group to learn from nonprofit leaders about best audit and accounting strategies.

 

 

Nonprofit Taxes & the IRS: Ep. 2 of A Modern Nonprofit Podcast

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A Modern Nonprofit Podcast is back for Episode 2. Tosha Anderson and Ben Golden of Golden Tax Relief discuss nonprofit taxes and the IRS!

But before we dive in, if you were lucky enough to donate to a charity this year, The Charity CFO thanks you. As expert accountants for nonprofits, our team knows that contributions of any kind are important. There is a lot of money involved in the nonprofit world, especially on the business side!

This episode covers nonprofit taxes.

A Modern Nonprofit Podcast Ep. 2 covers nonprofit taxes and dealing with the IRS.

Nonprofit Taxes and the IRS Key Points

Aside from payroll, the leaders agree that compliance is the key. When considering nonprofit taxes, Tosha and Ben discuss the responsibilities of nonprofit board leadership. They also talk about why you must have plans for payroll, reimbursements, and compensation purposes.

SUBSCRIBE, THEN LISTEN TO A MODERN NONPROFIT EPISODE 2: NONPROFIT TAXES AND AVOIDING TROUBLE WITH THE IRS FEAT. BEN GOLDEN OF GOLDEN TAX RELIEF

Administrative work is important for nonprofits, but if you are wondering if a nonprofit gets taxed, then listen in as Ben talks about how nonprofits can save money with taxes.

If you haven’t already, listen to Episode 1 of A Modern Nonprofit Podcast here. Tosha talks with Eileen McGhee of Veer Up to talk about how to reduce racism, be a diverse organization and promote a positive nonprofit culture.

Additional Links

Questions about the IRS and your nonprofit? The conversation continues at A Modern Nonprofit Facebook Group. Here, professionals collaborate to talk about industry trends and issues. Don’t miss out.

Additionally, if you are seeking help with wage garnishes and delinquent tax returns, check out Ben Golden at Golden Tax Relief.

Lastly, forget to Subscribe to A Modern Nonprofit Podcast for future episodes, and make sure to share/tag us on your Twitter, Facebook, and additional social media feeds!

 

How to Manage Payroll as a Nonprofit

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According to the United States Bureau of Labor Statistics, 12.3 million people are employed by nonprofits. That’s a lot of employees to manage!

Payroll is a critically important part of running any business and nonprofits are no different. This guide will explore everything you need to know about how to manage payroll for your nonprofit with accuracy.

Finding Payroll Services

Firstly, your organization needs a payroll manager and software to manage all the employee data. What is a payroll manager? This is someone specifically trained to manage the ins and outs of all your payroll needs including taxes and employee benefits.

Your organization likely needs to invest in a quality portal for payroll services. If your organization is really small and brand new, you might be able to get away with just a spreadsheet, but it’s not the best practice for accuracy and data transparency.

Payroll management isn’t easy and if you’re asking yourself how to manage my payroll, you’re definitely in need of professional assistance. Besides knowing the intricate details of payroll tax management and other tricky laws, these services can cut checks, facilitate direct deposits, and even track paid time off.

The best payment systems are two-sided so that employees can also log in and download their own data when they need it. Most of them even have smartphone apps!

This is a great resource for finding the payroll system that fits your organization. Paying a monthly cost for these services is well worth it in the long run for you and your employees to have a good work experience.

Getting Started With Payroll

As you get ready to start paying your employees, you should ask yourself a few key questions. This will help make tax season easier and ensure there aren’t any issues with your employees!

What Are Your Benefits?

Keeping track of all the information for each employee’s benefits can seem like a ton of work, but it’s crucial that the correct amount of money is removed from your employees’ pay checks each month.

Employee benefits might include, but aren’t limited to:

  • Health Insurance
  • Health Savings Account/Flexible Spending Account
  • Dental Insurance
  • Vision Insurance
  • Retirement Plan
  • Life Insurance
  • Transportation Fund
  • Paid Time Off
  • Sick Time

All of these benefits are up to the employer to offer, but every organization should verify their exact requirements to provide health insurance to their employees under the Affordable Care Act. This also may stipulate what portion, if any, of employee health insurance your nonprofit is required to cover.

Who Are Your Employees?

Do you hire contractors or part-time staff? These workers may not have employee benefits and their payroll will need some tweaking. Contractor taxes also differ from that of full-time employees, so be sure to have all of this information prior to starting.

In addition to collecting W-4 forms from employees, be sure to provide all necessary paperwork for enrolling in health insurance and other employee benefits. Keep meticulous records on each employee both digitally and in hard copies.

How Are You Handling Payroll Taxes?

Tax season might be everyone’s least favorite time of year, but it’s crucial for your nonprofit organization to withhold the correct amounts for each employee for both state and federal taxes, as your state allows.

After you collect each employee’s W-4 tax form, input the data into your payroll software and be sure to verify this information with your employee.

Here is a list of some taxes your organization might need to withhold from paychecks and potentially match per dollar:

  • Local Income Tax: This pertains to cities, like New York City or Washington D.C.
  • State Income Tax: Some states don’t have this, like Tennessee and Florida. It depends where your nonprofit is located.
  • Federal Income Tax: The W-4 will let you know how much to withhold for each paycheck.
  • Worker’s Compensation: This is to protect your nonprofit from any injuries that could occur on the job.
  • State Unemployment Tax: This is a pool of funds that go to unemployment benefits.
  • Social Security: This supports those on social security benefits.

What Are My Legal Requirements?

In addition to your requirements to provide healthcare, your full-time employees have rights that you must adhere to according to the law.

For example, depending on your state, you may be required to offer a certain amount of sick days or vacation days.

You also may be required to provide paid or unpaid leave for new parents. Check with your nonprofit legal counsel to learn your particular state’s legal requirements before setting up your payroll system and employee handbook.

Tips to Manage Payroll

Part-time employees, full-time employees, and contract workers all rely on your ability to pay them on time and in full. While nonprofits might be exempt from certain taxes, they still function as a business and owe their employees a progressive payment system that accommodates all their needs.

If you don’t want to hire a payroll service, here are a few more options.

Accounting Department: If your organization is growing rapidly, consider forming a department to handle all of the financial information in-house with the help of software.

Hire a Bookkeeper: Bookkeepers have an extensive knowledge of payroll and financial systems. They can either be someone you hire to be in-house, but if your organization is small it is worth investing in a company and being one of their clients. Then, your bookkeeper is only used when needed. This is a great way to cut costs while taking the burden of payroll off your own plate while ensuring accuracy for employees.

Online Payroll/Software: If you’re brave, scrappy, and financially inclined, try managing all of this on your own.

Finalizing Employee Payroll

Now that you have all the insider tips on how to manage payroll for your nonprofit, contact us for more information on how we can help your nonprofit have efficient and transparency pay processes.

After all, you should focus on your mission and we’ll handle the rest!