Private foundations are often set up with the purpose of giving out scholarships or grants to individuals. Before starting this program, the IRS requires a private foundation to request “approval” from them. There are certain criteria that must be met with the scholarship/grant program. So, when a private foundation submits a request for approval of their program, they must demonstrate that:
- Grants or scholarships will be awarded on an objective and non-discriminatory basis. The criteria used in selecting grant recipients should be related to the purpose of the grant. For example, if the foundation is awarding scholarships, consideration should be given to the student’s past academic performance, teacher recommendations, etc.
- There is a process to reasonably ensure that the amounts given to recipients will have the intended result, which is the activity the grant is intended to finance.
- The foundation must show that it will have a monitoring and oversight process after the grant is given and after the funds are used, to ensure that funding was used for the intended purpose.
Form 8940 (Request for Miscellaneous Determination) can be filed with the IRS to request this determination. A newly formed private foundation can also complete Schedule H of Form 1023 (application for tax exempt status) to request this advance approval.
By Colette Kamps, CPAPosted on February 17 2015 by admin
All section 501(c)(3) organizations are strictly prohibited from being directly or indirectly involved in campaigning activities for, on behalf of, or against a candidate running for public office, making contributions to political campaign funds, and making a public statement of position on behalf of the organization. However, did you know that 501 (c)(3) organizations are able to participate in certain non-partisan election activities?
These activities include:
- Voter Education
- Voter Registration
- Get-Out-The- Vote Drives
These activities must be conducted in a non-partisan manner or the organization would be at risk of losing its exempt status.
By Kristin Cullen, CPAPosted on February 11 2015 by admin
It’s important as a not-for-profit organization to accurately allocate expenses among your program(s), management and general, and fundraising. Many donors restrict grants and contributions specifically for the entity’s programs. Therefore, it’s vital to only allocate expenses that are related (either directly or indirectly) to the purpose or mission of the not-for-profit to the program functional category, and properly allocate expenses for administrative and support or fundraising to management and general and fundraising functional categories.
There are specific expenses that are clearly stated as supporting activities that you should not allocate to program. Some of these types of expenses are:
- Oversight-type expenses
- Business management expenses
- General recordkeeping expenses
- Expenses relating to budgeting and financing
- Soliciting funds associated with advertising that promotes the sales of goods or services
- Soliciting funds for government, foundation, and other requests for proposals for customer-sponsored contracts for goods and services
- Producing and distributing the annual report
The above list is not all-inclusive, but it does include the most common types of supporting services expenses.
Many costs are directly allocated to each area, as they are clearly either program, management and general or fundraising expenses. However, there are several areas of expenses with every not-for-profit that are shared costs (indirect costs). For example, occupancy, salary and related costs, depreciation, communication and other expenses may be shared among the functions. Therefore, it is important to determine a clear, reasonable allocation method that accurately reflects what function the expenses should be allocated to.
It is important to keep the aforementioned list in mind when determining allocation methods as well. If your not-for-profit is conducting a time study to determine the allocation percentage of each staff person’s time among the functions, your staff should be aware of what activities are considered management and general versus program or fundraising. If your program coordinator is assisting with preparing your annual budget, his or her salary for the time spent in budget preparation should be allocated to management and general. All time spent on oversight and management of the entity’s employees and business functions are management and general costs as well. Therefore, to conduct a time study that accurately reflects what your staff is spending their time on, you should educate them prior to the time study of what activities fall within each function.
Under GAAP, all not-for-profit organizations are required to report expenses by functional classification. This also allows financial statement users the ability to evaluate where the organization is spending its resources. Therefore, it is vital as a not-for-profit to understand what expenses should be classified to each function and to properly allocate the expenses based on the day to day activities of the entity.
By Samantha E. Mahlen, CPAPosted on February 3 2015 by admin
There are a number of reasons why you may have old, uncleared checks on your books. Whatever the reason, it is important to clean any checks that should be cleared off your books in order to make sure you are not overstating your cash balance.
First, you need to determine if the money is still owed to the customer/client/donor. Try contacting them to see if they have received the check. If the “customer” does not have the check, you will need to re-write the check and send it to them. Then you will need to void the old check and note in the memo line the check number you are replacing it with. If you determine the uncleared check is still owed, and you are unable to find or reach them, you must turn the money over to the unclaimed property division of the State of Arizona. For Arizona companies, you can visit http://www.azunclaimed.gov/ for more information on how to submit unclaimed funds.
If you determine that the uncleared check is not owed, then you can make a journal entry to clean the old uncleared items out of your outstanding checks listing. To do this, you would debit cash and credit the expense the check originally was expensed to. I would recommend noting the journal entry number of the entry you make to offset the uncleared check in the memo line of the check. Then on the next reconciliation you perform, you can clear the old uncleared checks and the journal entry that offsets the checks (for a zero net effect). QuickBooks bank reconciliations can really get cluttered up with these old items. It’s important to monitor, follow up on, and clean up any of these older items.
By Michelle HousmanPosted on January 14 2015 by admin
The process of changing anything relating to an organization’s tax exempt status can be very confusing. A public charity can be automatically converted to a private foundation by the IRS if they don’t meet the minimum public support percentage requirement. Public charity status is generally the more desirable status, but there may be a situation where a public charity actually voluntarily wishes to convert to a private foundation. In this case, the process of converting is fairly simple as follows:
- Download IRS Form 8940 (Request for Miscellaneous Determination) from IRS.gov.
- Fill out Part I of the form 8940, Identification of Organization.
- For Box 7 of Part I, follow the instructions at the top of the form. A user fee is required.
- Check Box 8g in Part II, Reclassification of Foundation Status, including a voluntary request from a public charity for private foundation status.
- Sign and date IRS Form 8940 and print signer’s name and title.
- Attach a request indicating your current public charity classification and the public charity classification to which you are requesting reclassification. Also, provide a statement describing any adverse impact if you do not receive the requested status.
- Send IRS Form 8940, attached request, and check to:
Internal Revenue Service
P.O. Box 12192
Convington, KY 41012-0192
Once the IRS receives the Form 8940, formal change request, and user fee, they will either approve or deny the request. If approved, the organization will receive a letter that formally approves the organization’s reclassification from a public charity to a private foundation. The organization should also begin filing the Form 990-PF (rather than Form 990) annually.
It is important to note that there are many “rules” to be aware of as a private foundation and appropriate consideration should go into changing from public to private.
By David WoodsPosted on December 23 2014 by admin
On December 10, 2014, the IRS issued Notice 2014-79, announcing the optional standard mileage rates to be used for tax purposes and mileage reimbursements in 2015. These rates are effective January 1, 2015.
- The standard mileage rate for business use will increase from 56 cents per mile to 57.5 cents per mile.
- The standard mileage rate for medical purposes or for moving will decrease from 23.5 cents per mile to 23 cents per mile.
- The standard mileage rate used when providing services to a charitable organization will remain the same as 2014, at 14 cents per mile.
The notice also provides updates to the mileage rates to be used for tax basis depreciation. Notice 2014-79 can be found on the IRS website.
By Paul BiggsPosted on December 18 2014 by admin
Whenever a non-profit organization receives a donation of a motor vehicle, boat, and/or airplane that has a value of more than $500, they are required to file a Form 1098-C with the IRS. These forms must be filed on an official printed version that is scan-able by the IRS. You can obtain these forms by calling the IRS or going to their website. The nonprofit organization is required to provide the donor with written acknowledgment of the contribution within 30 days of the transaction. The official version of the form 1098-C includes two carbon copies (copy B of Form 1098-C and copy C of Form 1098-C) which can be used to give to the donors. The donor will also need this form to report the deduction on their personal taxes. You have until the following February after the calendar year in which you received the contribution to file the 1098-C form with the IRS. (I.e. if you received the donation in the calendar year 2014, you have until February 2015 to file with the IRS). All Forms 1098-C must be submitted with a Form 1096 transmittal form. For more in depth details of instructions, visit www.irs.gov.
By Michelle HousmanPosted on November 25 2014 by admin
Many organizations offer employee discounts as a benefit of working for its entity. A common misconception is to account for these discounts the same way an entity would account for a discount to a customer: net the discount against sales. For tax exempt, or not-for profit-entities, employee discounts should be accounted for differently.
Since the discount is considered a benefit of employment, the not-for-profit should expense the discount in a similar way as expensing the employer’s portion of health insurance premiums. When the not-for-profit makes a sale to an employee, the entity should increase revenue by the full price of the product, increase cash for the amount received from the employee, and increase an expense account (employee benefits: discount on sale) for the amount given as a discount. The employee discount should be allocated among the functional expense categories based on how the employee’s salary is allocated.
For example, Suzie, an employee of ABC Charities, wants to purchase a jacket from the charity’s store. Employees are allowed to take a 20% discount on all merchandise they purchase. The coat Suzie wants is $200. This single purchase would result in an entry to the accounting system as a credit to sales of $200, a debit to cash of $160 and a debit to employee discount as an expense.
By Samantha E. Mahlen, CPAPosted on November 19 2014 by admin
Schedule A of the Form 990 is required to be completed by all public charities. This schedule shows the IRS how the Organization is a public charity (versus a private foundation) and also proves that the Organization is receiving enough support from the general public, in order to maintain its status as a public charity. The general rule is that the Organization must receive at least 33 1/3% of total support from the general public in aggregate over the last 5 years.
One area of potential confusion is on page 1 of the Schedule A, where the Organization is required to check a box to indicate which category they fit into that ensures their public charity status. In general, the box checked should match the category selected on the Organization’s original tax exemption application with the IRS (Form 1023). However, the Organization is allowed to change the category when circumstances change and a different category suits them more accurately. Although it is not required, the charity can also request an official approval of the change in category by filing Form 8940 with the IRS.
Box 7 and Box 9 are probably the two most commonly selected categories checked on page 1 of Schedule A, and sometimes there is confusion as to which of these two categories applies. In a very basic sense, box 7 should be checked when the majority of the charity’s revenue is from the general public, and box 9 should be checked when the majority of the charity’s revenue is from program service fees.
One point to remember is if you have any revenue from the government, it may meet the definition of being a contribution for purposes of the Form 990 and Schedule A, even if it doesn’t meet the definition of contribution under GAAP. This should be reviewed carefully when completing lines 1 and 2 on Part VIII of the Form 990 because where the amount is reported on that page affects where it is reported on Schedule A, and therefore affects the public support percentage calculation. For purposes of the Form 990 (and Part VIII), a government contribution would be any revenue from the government where the general public ends up receiving the primary benefit from the use of those funds, rather than the government receiving the primary benefit.
By Colette Kamps, CPAPosted on November 12 2014 by admin
There are a lot of rules to remember when nonprofit organizations hold raffles. Here is a summary of those rules to keep in mind and to help with planning in advance of the raffle.
- If the raffle prize is valued at $600 or more AND at least 300 times the raffle ticket price, you must REPORT to the IRS by completing a Form W-2G. Keep in mind that you will need certain information from the raffle winner, such as name, address and social security number.
- If the raffle prize is valued at $5,000 or more, you must REPORT and WITHHOLD income tax from the winner at the time of turning over the prize. For example, the raffle prize is a diamond necklace valued at $10,000. Before turning over that necklace to the winner, the winner must write you a check for the withholding amount. The withholding rate is 28%.
- If the organization decides to pay the withholding taxes on the winner’s behalf, the amount that the organization pays in to the IRS should be 33.3% of the original prize value, since the winner is getting this “extra” value of not having to pay the withholding. Therefore, they have to include this “extra” value as income on their W-2G.
- If the winner refuses to provide you with their social security number AND the prize is valued at $600 or more, the organization must WITHHOLD taxes at the 28% rate. Normally, you wouldn’t have to withhold if the prize value is less than $5,000, so this is a special circumstance when the winner refuses to provide his or her social security number.
- Once you withhold taxes, you have to pay those taxes into the IRS. You do this by completing Form 945 at the end of the year. But if the amounts collected are greater than $2,500, you will need to pay those amounts before the end of the year.
- Also at the end of the year, you will need to file the Forms W-2G with the IRS. You will need to submit these forms along with the summary Form 1096.
By Colette Kamps, CPA-- Older Entries »
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- Private Foundations Need IRS Approval for Grants
- Non-Profits and Political Activities
- Functional Expense Allocation
- How to Clean Up Old, Uncleared Checks in QuickBooks
- Public Charity to a Private Foundation
- IRS Announces 2015 Mileage Rates
- IRS Form 1098-C
- Accounting Treatment of Employee Discounts for a Tax Exempt Entity
- Are you baffled by Schedule A?
- The Rules of Raffles