Tag Archives: 501(c)(3)

Thanking Donors – What’s required by the IRS?

Pam WilliamsJanuary 13, 20160 Comment

by Meagan Bulloch

As year-end fundraising drives have now ended, the development departments of many non-profits are busy preparing contribution acknowledgements or “thank you” letters. So, how can these non-profits ensure they give the donors what they expect and what the IRS requires?

If a monetary contribution was made for which the organization did not provide any good or service in return, the donor is required to have a bank record or written acknowledgement of the gift before they can claim a charitable contribution deduction on their federal tax return. It is acceptable if the acknowledgement is provided electronically to the donor but many organizations still find value in mailing personalized thank you letters.

If the donation received is greater than $250, a basic thank you note not will not suffice as adequate support for the IRS. To aid your donors the organization should provide the following information in the acknowledgement/thank you letter:

Name of your organization
Statement that the non-profit is a recognized tax-exempt entity under IRS under Section 501(c)(3)
Amount of cash contribution or description of non-cash donation (but NOT the value)
Date the donation was received
A statement that no goods or services were provided by the organization in return for the contribution

Separate acknowledgements can be provided for each contribution exceeding $250, or an annual acknowledgement can be provided if more practical. Best practice is that acknowledgement(s) should be provided to donors no later than January 31 of the year following the donation.

If your organization received a quid pro quo contribution, when a donor makes a payment exceeding $75 that is comprised of both a contribution and a good or service provided by the organization, the organization is required to provide a written disclosure.

Example – The organization holds a dinner valued at $40 and charges a ticket price of $100, the donor’s tax deduction is limited to $60. However, because the total amount paid was greater than $75, the organization must provide a disclosure statement to the donor even though the value of the contribution is less than $75. The disclosure statement provided to donors should include:

A statement informing the donor of the amount of the contribution that is tax deductible – limited to the excess of the contribution less than fair market value of the goods or services received
A good faith estimate of the fair market value of the goods and services

A penalty is imposed on charities that do not meet the written disclosure requirement. The penalty is $10 per contribution, not to exceed $5,000 per fundraising event or mailing. An organization may avoid the penalty if it can show that failure to meet the requirements was due to reasonable cause.

But what if…

Gifts in-kind with a market value in excess of $5,000 may require an appraisal (that the donor can be required to pay for)

The above guidelines are detailed in the IRS Publication 1771, these rules do not apply to a donated motor vehicle, boat or airplane if the claimed value exceeds $500. (See IRS Publication 4302, A Charity’s Guide to Vehicle Donations and IRS Publication 4303, A Donor’s Guide to Vehicle Donations).

Meagan ([email protected]) is an Audit Manager at Langdon & Company LLP. She works primarily with non-profits in various industries.

Tax Exempt Status Does Not Imply Freedom from All Taxes and Related Filing Requirements

Pam WilliamsOctober 10, 20140 Comment

by Tony Pandiscia,

As a CPA firm, we often encounter new or existing organizations inquiring about becoming tax exempt under a misconception that “tax exempt status” provides a broad immunity from all taxes and tax return filings. As a refresher, Tax Exempt Organizations (or “TEOs”) attain a legal existence under the province of state law (such as North Carolina’s “Nonprofit Incorporation Statutes”) before applying for “tax exempt status” with our Federal Government. Once the Internal Revenue Service grants a TEO Federal exempt status, a key benefit is the exclusion from income tax on all program service related revenue (i.e. revenues generated from activities directly related to a TEO’s exempt purpose). However the following represent other tax-related filings and liabilities that nevertheless apply to TEO:

INCOME TAX FILINGS AND UNRELATED INCOME. Although enjoying an exemption from income tax liability on “program service revenue”, to preserve its tax exempt status a TEO must annually file Form 990, Return of Organization Exempt from Income Tax and disclose all relevant financial information and exempt function policies and procedures. In addition, whenever income is generated via activities that are not related to an organization’s stated exempt purpose, “Unrelated Business Income Tax” (or “UBIT”) is earned. A UBIT tax return must be filed with both the Internal Revenue Service and North Carolina Department of Revenue and corresponding UBIT tax payments remitted.

SALES TAXES. Apart from the income tax reporting requirements, TEOs are put on a nearly level playing field with all businesses and consumers with respect to North Carolina Sales & Use Tax. North Carolina’s “Sales & Use Tax” is an ad valorem tax typically levied at the point of purchase, although a TEO may later recoup (via filing of a refund claim form) any taxes paid for purchases used directly in furtherance of its exempt purpose.

Beginning in 2015, TEOs who charge admission to attend a live function will be subject to Sales & Use Tax on the admission charge levied on attendees. Only TEOs that rely entirely on volunteer workforce and do not compensate any of the performers in the entertainment event will qualify for exemption. In addition, TEOs should properly designate those amounts that do not strictly represent a charge for admission (including membership fees, specific charitable donations, and payment for amenities such as parking or merchandise discounts) as they may excluded from the sales tax base.

SOLICTATION LICENSES. All TEOs that solicit contributions in North Carolina must register with the Secretary of State and obtain a “Charitable Solicitation License” [“CSL”]. Once obtained, the organization must annually renew the CSL with the filing of a renewal form, payment of a fee, and submission of financial data. A very narrow exemption from the licensing requirements applies for TEOs that solicit less than $25,000 of contributions per year and which are run entirely by volunteer labor. Upon request, the Secretary of State does permit affiliate organizations to request a “consolidated” license that covers all organizations in the group.

In summary, as a sound tax policy designed to incentivize organizations to engage in charitable activities, tax exempt status grants to a TEO a valuable freedom from income tax on program service revenue. However organizations must remember that the exemption from income tax is not a blanket exemption from all manner of taxes and filing requirements. Tax Exempt Organizations must plan accordingly to meet the filing and tax payment obligations, and avoid subjecting themselves to excessive penalties and exemption jeopardy.

Tony lead’s our tax department as an attorney and Certified Public Accountant with over twenty years of experience. Tony consults regularly with exempt organizations on matters related to recognition and preservation of tax status, unrelated business income tax, executive compensation, and internal policy matters. His expertise includes additional industries such as healthcare, real estate, research & development, manufacturing, and professional services. Tony is a frequent seminar instructor for the North Carolina Association of CPAs, for local trade groups and is regularly called upon by litigation counsel to provide expert witness testimony.

Please feel free to contact our office for more information. Tony and our highly qualified tax department are available to answer your tax questions and provide any assistance you may need.

Adult Care Provider News

Pam WilliamsSeptember 9, 20140 Comment

dhhs North Carolina General Assembly passed Senate Bill 744, section 12H.11 mandating the submission of Adult Care Cost Report under General Statute 131D-4.2. The deadline is December 31, 2014. Providers that do not receive State/County Special Assistance or Medicaid personal care are exempt from the reporting requirements of this section. However, these providers must file the Exemption Form, also due December 31. According to the Controller’s website the information for the 2013-2014 Cost Report, Instructions, and 2013-2014 Chart of Accounts are all “Coming Soon.”

Langdon & Company LLP will continue to stay current on the latest developments as well. Please call our office if we can provide any assistance in the submission process!

IRS Unveils New Form for Organizations Applying for 501(c)(3) Tax-Exempt Status

Pam WilliamsJuly 18, 20140 Comment

by Taylor Elliott

On July 1, 2014, the Internal Revenue Service (IRS) released Form 1023-EZ as part of its efforts to streamline the application process for organizations seeking tax-exempt status. The form is specifically designed for charities who wish to be classified as exempt under section 501(c)(3). An organization must meet several criteria in order to be eligible to apply using the form, including a gross receipts test of $50,000 or less as well as an assets test of $250,000 or less. The form instructions outline additional criteria, including an eligibility worksheet that helps charities determine whether the form is right for them through a series of yes and no questions.

The IRS has indicated that the overall goal in developing Form 1023-EZ is to reduce the time and paperwork associated with providing a charity a determination as to its tax-exempt status. Previously, the IRS has been intensely criticized for a lengthy and cumbersome 1023 application process that includes an application backlog that is many months behind. Until now, all organizations, regardless of size, have been subject to the same 23-page form filled with a seemingly endless list of tedious questions, many of which are not relevant to smaller, simpler charities. After soliciting feedback from impacted parties, the IRS was able to whittle down to Form 1023-EZ, a three-page form containing only the most essential questions pertaining to determination of tax-exempt status of smaller organizations. According to IR-2014-77, as many as 70% of applicants are expected to be eligible to use this form, not only slashing the time spent by those charities in completing the application but also minimizing the time spent by the IRS in reviewing their files. The electronic filing requirement is also expected to increase the efficiency of the process. An application fee of $400 must be electronically submitted with the application as well.

For questions about this form or the tax-exempt application process in general, please contact our office. We would love to discuss with you the ways that Langdon and Company LLP can help your organization obtain and maintain a tax-exempt status.

Taylor Elliott is a tax manager with Langdon & Company LLP. She specializes in tax compliance and planning, working with several not-for-profit organizations in the Triangle area.