All posts by Erin Mirante

Employers can truncate SSNs on employees’ W-2s

 

The IRS recently issued final regulations that permit employers to voluntarily truncate employee Social Security Numbers (SSNs) on copies of Forms W-2 furnished to employees. The purpose of the regs is to aid employers’ efforts in protecting workers from identity theft.

Proposals and comments

On September 20, 2017, the IRS issued proposed regs on the truncation concept. A truncated taxpayer identification number (TTIN) displays only the last four digits of a taxpayer identifying number and uses asterisks or “Xs” for the first five digits.

Seventeen comments were submitted on the notice of proposed rulemaking and many recommended adopting the rules. Some disagreed and noted concerns of employees not being able to verify whether the SSN filed with the Social Security Administration and IRS is correct. Other comments indicated concerns that it would be more difficult for tax return preparers to verify the employee has provided the correct SSN.

But the IRS and U.S. Department of the Treasury determined that the benefit of allowing truncation outweighs the risk that unintended consequences could occur. Moreover, the agencies believed problems could be mitigated. For example, tax return preparers can use Forms W-2 containing truncated SSNs to verify employee information by using the last four digits of the SSN and the employee’s name and address.

Other considerations

Another objection noted an increased administrative burden on employers with employees who work in multiple states because the employer will have to determine the requirements for each state. (Some state and local governments may not allow truncation.) This, too, was rejected by the IRS and Department of the Treasury. The agencies explained that the rules accommodate potential burdens on employers by making truncation optional.

It was also suggested that a better way to protect employees’ identities is to require employers to furnish the employee copy of Form W-2 electronically. But this was outside the scope of the rule and, under existing rules, employers are permitted to furnish Form W-2 electronically if the employee consents.

Final regs

The final regulations amend existing regs to permit employers to voluntarily truncate employees’ SSNs on copies of Forms W-2 that are furnished to employees so that the truncated SSNs appear in the form of IRS TTINs. The final regs also:

  • Amend the regulations under Internal Revenue Code Section 6109 (supplying of identifying numbers) to clarify the application of the truncation rules to Form W-2,
  • Add an example illustrating the application of these rules, and
  • Delete obsolete provisions and update cross references in the regs under Sec. 6051 (receipts for employees) and Sec. 6052 (returns regarding payment of wages in the form of group term life insurance).

The final regulations took effect on the date of publication in the Federal Register: July 3, 2019.

Important role

Employers play an important role in the fight against identity theft. Consider whether truncation of employees’ SSNs on W-2s is a feasible step for you. Contact us for further information and assistance.

© 2019

Avoid excess benefit transactions and keep your exempt status

One of the worst things that can happen to a not-for-profit organization is to have its tax-exempt status revoked. Among other consequences, the nonprofit may lose credibility with supporters and the public, and donors will no longer be able to make tax-exempt contributions.

Although loss of exempt status isn’t common, certain activities can increase your risk significantly. These include ignoring the IRS’s private benefit and private inurement provisions. Here’s what you need to know to avoid reaping an excess benefit from your organization’s transactions.

Understand private inurement

A private benefit is any payment or transfer of assets made, directly or indirectly, by your nonprofit that’s:

  1. Beyond reasonable compensation for the services provided or the goods sold to your organization, or
  2. For services or products that don’t further your tax-exempt purpose.

If any of your nonprofit’s net earnings inure to the benefit of an individual, the IRS won’t view your nonprofit as operating primarily to further its tax-exempt purpose.

The private inurement rules extend the private benefit prohibition to your organization’s “insiders.” The term “insider” or “disqualified person” generally refers to any officer, director, individual or organization (as well as their family members and organizations they control) who’s in a position to exert significant influence over your nonprofit’s activities and finances. A violation occurs when a transaction that ultimately benefits the insider is approved.

Make reasonable payments

Of course, the rules don’t prohibit all payments, such as salaries and wages, to an insider. You simply need to make sure that any payment is reasonable relative to the services or goods provided. In other words, the payment must be made with your nonprofit’s tax-exempt purpose in mind.

To ensure you can later prove that any transaction was reasonable and made for a valid exempt purpose, formally document all payments made to insiders. Also ensure that board members understand their duty of care. This refers to a board member’s responsibility to act in good faith, in your organization’s best interest, and with such care that proper inquiry, skill and diligence has been exercised in the performance of duties.

Avoid negative consequences

To ensure your nonprofit doesn’t participate in an excess benefit transaction, educate staffers and board members about the types of activities and transactions they must avoid. Stress that individuals involved could face significant excise tax penalties. For more information, please contact us.

© 2019

When nonprofits need to register in multiple states

Many not-for-profit organizations use fundraising methods that cross state boundaries. If your nonprofit is one of them, it may need to register in multiple jurisdictions. But keep in mind that registration requirements vary — sometimes dramatically — from state to state. So be sure to determine your obligations before you invest time and money in registering.

The critical activity

How do you know if your nonprofit needs to register in other states? The critical activity is soliciting donations, not receiving them. So if your charity receives occasional contributions from out-of-state donors, you may not need to register in those states if you never asked for the contributions. However, email and text blasts and social media appeals are likely to be considered multistate solicitations.

Even so, a handful of state don’t require certain nonprofits to register. For example, they may exempt houses of worship as well as nonprofits with total annual income under certain thresholds. Other states may require charities to register but exempt them annual filing. All of the states have varying rules, income thresholds, exceptions, registration fees and fines for violations. Even the agencies that regulate charities differ by state.

No easy way

Unfortunately, there isn’t a simple way to register with every state. Most states require you to complete a general information form and submit it with:

  • Your last financial statement,
  • A list of officers and directors,
  • A copy of your originating document, and
  • Your IRS-issued tax-exempt determination letter.

 

Registration fees range from $0 to $2,000.

First-time registrants can use a Unified Registration Statement in most states. However, even those states mandate that annual renewals and reports be submitted using individual state forms.

Possible consequences

If your nonprofit fails to register in states where it raises funds, the consequences can be severe.Your organization, officers and board members could face civil and criminal penalties. Your charity might lose its ability to solicit funds in certain states or even lose its tax-exempt status with the IRS. Nonprofits must also list the states where they’re registered on their Form 990s.

For some nonprofits — particularly smaller organizations — cross-state registration requirements and potential penalties may lead them to limit fundraising to their own states. Contact us for help determining your registration obligations.

Does your nonprofit need a CFO?

Your not-for-profit’s ability to pursue its mission depends greatly on its financial health and integrity. If your nonprofit is growing and your executives are struggling to juggle financial responsibilities, it may be time to hire a chief financial officer (CFO).

Core responsibilities

Generally, the nonprofit CFO (also known as the director of finance) is a senior-level position charged with oversight of accounting and finances. He or she works closely with the executive director, finance committee and treasurer and serves as a business partner to your program heads. A CFO reports to the executive director or board of directors on the organization’s finances. He or she analyzes investments and capital, develops budgets and devises financial strategies.

The CFO’s role and responsibilities vary significantly based on the organization’s size, as well as the complexity of its revenue sources. In smaller nonprofits, CFOs often have wide responsibilities — possibly for accounting, human resources, facilities, legal affairs, administration and IT. In larger nonprofits, CFOs usually have a narrower focus. They train their attention on accounting and finance issues, including risk management, investments and financial reporting.

Making the decision

How do you know if you need a CFO? Weigh the following factors:

  • Size of your organization,
  • Complexity and types of revenue sources,
  • Number of programs that require funding, and
  • Strategic growth plans.

Static organizations are less likely to need a CFO than not-for-profits with evolving programs and long-term plans that rely on investment growth, financing and major capital expenditures.

The right candidate

At a minimum, you want a CFO with in-depth knowledge of the finance, accounting and tax rules particular to nonprofits. Someone who has worked only in the for-profit sector may find the differences difficult to navigate. Nonprofit CFOs also need a familiarity with funding sources, grant management and, if your nonprofit expends $750,000 or more of federal assistance, single audit requirements. The ideal candidate should have a certified public accountant (CPA) designation and, optimally, an MBA.

In addition, the position requires strong communication skills, strategic thinking, financial reporting expertise and the creativity to deal with resource restraints. Finally, you’d probably like the CFO to have a genuine passion for your mission — nothing motivates employees like a belief in the cause.

Consider outsourcing

If your budget is growing and financial matters are becoming more complicated, you may want to add a CFO to the mix. Otherwise, consider outsourcing CFO responsibilities to a CPA firm. Contact us for more information.

© 2019

Developing a fundraising plan that works

A not-for-profit can have many strengths — a prominent board of directors, dedicated volunteers, committed staff members and effective programs — and still struggle to meet fundraising goals. Often, such nonprofits lack a strategic fundraising plan. Here’s how to develop one that can get better results.

Get the committee rolling

The first step is to form a fundraising committee consisting of board members, your executive director and other key staffers. You may also want to include major donors and active community members.

Committee members should start by reviewing past sources of funding and past fundraising approaches, and weighing the advantages and disadvantages of each. Even if your overall fundraising efforts have been less than successful, some sources and approaches may still be worth keeping. Next, brainstorm new donation sources and methods and select those with the greatest fundraising potential that are also likely to succeed.

As part of your plan, outline the roles you expect board members to play in fundraising efforts. For example, in addition to making their own donations, they can be crucial links to corporate and individual supporters.

Set it in motion

Once the committee has developed a plan for where the funds will hopefully come from and how to ask for them, it’s time to create a functional budget that includes operating expenses, staff costs and volunteer projections. Then, after the plan and budget have board approval, develop an action plan for achieving each objective and assign tasks to specific individuals.

Most important, once you’ve set your plan in motion, don’t let it sit on the shelf. Continually evaluate the plan and be ready to adapt it to organizational changes and unexpected situations. Although you want to give new fundraising initiatives time to succeed, don’t be afraid to cut your losses if it’s obvious an approach isn’t working.

Planning pays off

Developing a strategic plan for successful fundraising can take time and effort. However, it’s been said that every hour in effective planning saves three to four hours of work. Just remember that planning doesn’t replace doing.

Contact us for more ideas on how to meet fundraising objectives and grow your nonprofit’s revenues.

© 2019

IRS raises valuation limit for employer-provided vehicles

One of the most popular fringe benefits for employees at many organizations isn’t an insurance plan or a health club membership; it’s shiny chrome and steel — a vehicle. Providing a car, van or truck that an employee can use for both work and personal purposes can attract better job candidates or just make sense practically. If your organization offers such a fringe benefit, you should know that the IRS recently updated its valuation limit for employer-provided vehicles.

Read the Notice

Generally, you must include the value of an employer-provided vehicle that’s available for personal use in an employee’s income and wages. The personal use may be valued using the cents-per-mile or fleet-average valuation rules for the 2019 calendar year.

Because of tax law changes under the Tax Cuts and Jobs Act (TCJA), the maximum dollar limitations on the depreciation deductions for passenger automobiles significantly increased and the way inflation increases are calculated changed. In Notice 2019-8, issued early this year, the IRS and the U.S. Treasury Department noted their intention to amend regulations to incorporate a higher base value of $50,000 to be adjusted annually.

Sure enough, in May the IRS issued Notice 2019-34. It provides that, for 2019, the maximum fair market value of a vehicle (including cars, vans and trucks) for use with the vehicle cents-per-mile and fleet-average valuation rules is $50,400.

Expect revisions

Because current regulations haven’t yet been updated to reflect the changes under the TCJA, the IRS provides relief to taxpayers in the form of interim guidance for 2019 in the notice. The agency (along with the Treasury Department) intends to revise the rules for the 2018 and 2019 tax years.

One example of the intended revisions addresses what an employer should do if it didn’t qualify to adopt the vehicle cents-per-mile valuation rule on the first day on which a vehicle was used by an employee for personal use because, under the rules in effect before 2018, the vehicle had an FMV more than the maximum permitted. In such cases, the employer will be allowed to first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year based on the maximum FMV of a vehicle for purposes of the vehicle cents-per-mile valuation rule.

Another intended revision noted in Notice 2019-34 will permit an employer to adopt the fleet-average valuation rule for the 2018 or 2019 tax year if the employer didn’t qualify to use the fleet-average valuation rule before January 1, 2019, because the maximum value limitation before 2018 couldn’t be met.

Rely on the guidance

Until revised final regulations are published, taxpayers may rely on the interim guidance provided in Notice 2019-34. Our firm can help you fully understand both the interim guidance and any future revisions to the rules for employer-provided vehicles. Contact us today with any questions you may have!

© 2019

Holding on to your nonprofit’s exempt status

If you think that, once your not-for-profit receives its official tax-exempt status from the IRS, you don’t have to revisit it again, think again. Whether your organization is a Section 501(c)(3), Sec. 501(c)(7) or other type, be careful. The activities you conduct, the ways you generate revenue and how you use that revenue could potentially threaten your exempt status. It’s worth reviewing the IRS’s exempt-status rules to make sure your organization is operating within them.

Hot buttons

There are many categories of tax exemption — each with its own rules. But certain hot-button issues apply to most tax-exempt entities. These include:

Lobbying. Having a Sec. 501(c)(3) status limits the amount of lobbying a charitable organization can undertake. This doesn’t mean lobbying is totally prohibited. But according to the IRS, your organization shouldn’t devote “a substantial part of its activities” trying to influence legislation.

For nonprofits that are exempt under other categories of Sec. 501(c), there are fewer restrictions on lobbying activities. Lobbying activities these groups undertake must relate to the accomplishment of the group’s purpose. For instance, an association of teachers can lobby for education reform without risking its tax exemption.

Campaign activities. The IRS considers lobbying to be different from campaign activities, which are completely off limits to Sec. 501(c)(3) organizations. This means they can’t participate or intervene in any political campaign for or against a candidate for public office. If you’re not a 501(c)(3) organization, campaign restrictions vary.

Excess profit and private inurement. The cardinal rule about profits is that a nonprofit can’t be operated to benefit private interests. If your fundraising is successful and you have extra income, you must put it back into the organization through additional services or by creating a reserve or an endowment. You can’t use extra income to reward an individual or a person’s related entities.

Unrelated revenue. If you’re generating income through a trade or business you conduct regularly and it’s outside the scope of your mission, you may be subject to unrelated business income tax (UBIT). Examples include a university that rents performance halls to nonuniversity users or a charity selling advertising in its newsletter.

Almost all nonprofits are subject to this provision of the tax code, and, if you ignore it, you could risk your exempt status. That said, losing an exempt status from unrelated business income is rare.

Know the rules

IRS Publication 557, Tax-Exempt Status for Your Organization, outlines the rules for all nonprofits that qualify for exempt status. We can help your nonprofit interpret and apply the information based on its specific situation. Contact us today!

© 2019

Buy vs. lease: Business equipment edition

Life presents us with many choices: paper or plastic, chocolate or vanilla, regular or decaf. For businesses, a common conundrum is buy or lease. You’ve probably faced this decision when considering office space or a location for your company’s production facilities. But the buy vs. lease quandary also comes into play with equipment.

Pride of ownership

Some business owners approach buying equipment like purchasing a car: “It’s mine; I’m committed to it and I’m going to do everything I can to familiarize myself with this asset and keep it in tip-top shape.” Yes, pride of ownership is still a thing.

If this is your philosophy, work to pass along that pride to employees. When you get staff members to buy in to the idea that this is your equipment and the success of the company depends on using and maintaining each asset properly, the business can obtain a great deal of long-term value from assets that are bought and paid for.

Of course, no “buy vs. lease” discussion is complete without mentioning taxes. The Tax Cuts and Jobs Act dramatically enhanced Section 179 expensing and first-year bonus depreciation for asset purchases. In fact, many businesses may be able to write off the full cost of most equipment in the year it’s purchased. On the downside, you’ll take a cash flow hit when buying an asset, and the tax benefits may be mitigated somewhat if you finance.

Fine things about flexibility

Many businesses lease their equipment for one simple reason: flexibility. From a cash flow perspective, you’re not laying down a major purchase amount or even a substantial down payment in most cases. And you’re not committed to an asset for an indefinite period — if you don’t like it, at least there’s an end date in sight.

Leasing also may be the better option if your company uses technologically advanced equipment that will get outdated relatively quickly. Think about the future of your business, too. If you’re planning to explore an expansion, merger or business transformation, you may be better off leasing equipment so you’ll have the flexibility to adapt it to your changing circumstances.

Last, leasing does have some tax breaks. Lease payments generally are tax deductible as “ordinary and necessary” business expenses, though annual deduction limits may apply.

Pros and cons

On a parting note, if you do lease assets this year and your company follows Generally Accepted Accounting Principles (GAAP), new accounting rules for leases take effect in 2020 for calendar-year private companies. Contact us for further information, as well as for any assistance you might need in weighing the pros and cons of buying vs. leasing business equipment.

© 2019

Writing a winning grant proposal

Competition is as fierce as it has ever been for private and public grants to not-for-profits. If your funding model depends on receiving adequate grant money, you can’t afford to submit sloppy, unprofessional grant proposals. Here are some tips on writing a winner.

Do your research

Just as you’d research potential employers before applying for a job, you should get to know grant-making organizations before asking for their support. Familiarize yourself with the grant-maker’s primary goals and objectives, the types of projects it has funded in the past, and its grant-making processes and procedures.

Performing research enables you to determine whether your programs are a good fit with the grant-maker’s mission. If they aren’t, you’ll save yourself time and effort in preparing a proposal. If they are, you’ll be better able to tailor your proposal to your audience.

Support your request

Every grant proposal has several essential elements, starting with a single-page executive summary. Your summary should be succinct, using only the number of words necessary to define your organization and its needs. You also should include a short statement of need that provides an overview of the program you’re seeking to fund and explains why you need the money for your program. Other pieces include a detailed project description and budget, an explanation of your organization’s unique ability to run this program, and a conclusion that briefly restates your case.

Support your proposal with facts and figures but don’t forget to include a human touch by telling the story behind the numbers. Augment statistics with a glimpse of the population you serve, including descriptions of typical clients or community testimonials.

Follow the rules

Review the grant-maker’s guidelines as soon as you receive them so that if you have any questions you can contact the organization in advance of the submission deadline. Then, be sure to follow application instructions to the letter. This includes submitting all required documentation on time and error-free. Double-check your proposal for common mistakes such as:

  • Excessive length,
  • Math errors,
  • Overuse of industry jargon, and
  • Missing signatures.

Take the time

To produce a winning proposal, you need to give yourself a generous time budget. Researching the grant-maker, collecting current facts and statistics about your organization, composing a compelling story about your work and proofreading your proposal all take more time than you probably think they do. Above all, don’t leave grant proposal writing to the last minute. Contact Langdon & Company LLP if you have any questions!

© 2019

How to convince donors to remove “restricted” from their gifts

Restricted gifts — or donations with conditions attached — can be difficult for not-for-profits to manage. Unlike unrestricted gifts, these donations can’t be poured into your general operating fund and be used where they’re most needed. Instead, restricted gifts generally are designated to fund a specific program or initiative, such as a building or scholarship fund.

It’s not only unethical, but dangerous, not to comply with a donor’s restrictions. If donors learn you’ve ignored their wishes, they can demand the money back and sue your organization. And your reputation will almost certainly take a hit. Rather than take that risk, try to encourage your donors to give with no strings attached.

Personal touch

Some donors simply don’t realize how restricted gifts can prevent their favorite charity from achieving its objectives. So when speaking with potential donors about their giving plans, praise the benefits of unrestricted gifts. Explain how donations are used at your organization, offering hard numbers and examples where needed. Be as upfront as possible and give them as much information as you can about your organization.

To make unrestricted giving as easy as possible, give donors (and their advisors) sample bequest clauses that refer to the general mission and purpose of your organization. Also encourage them to include wording that shows “suggestions” or “preferences” for their donations, as opposed to binding restrictions. Prepare documents that give wording samples for these cases.

Words of intent

Unless you’re holding a fundraiser to benefit a specific program, include general giving statements in your fundraising materials. For example, you might say: “All gifts will be used to further the organization’s general charitable purposes,” or “Your donations to this year’s fundraiser will be used toward the continued goal of fulfilling our organization’s mission.”

Reinforce this message in your donor thank-you letters. They should state your nonprofit’s understanding of how the gift is intended to be used. For example, if a donor stipulated no restrictions, explain that the money will be used for general operating purposes.

Gentle persuasion

Obviously, you’ll need to be respectful if a donor is determined to attach strings to a gift. (Before accepting it, just make certain you’ll be able to carry out the donor’s wishes.) But if you can persuade contributors that their gifts will be used in a responsible and mission-enhancing way, many are likely to remove restrictions.

Contact us for more information on using restricted and unrestricted funds.

© 2019