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

Erin Mirante0 Comment

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

5 questions can help nonprofits avoid accounting and tax mistakes

Erin Mirante0 Comment

To err is human, but some errors are more consequential — and harder to fix — than others. Most not-for-profit organizations can’t afford to lose precious financial resources, so you need to do whatever possible to minimize accounting and tax mistakes. Get started by considering the following five questions:

  1. Have we formally documented our accounting processes? All aspects of managing your nonprofit’s money should be reflected in a detailed, written accounting manual. This should include how to accept and deposit donations and pay bills.
  2. How much do we rely on our accounting software? These days, accounting software is essential to most nonprofits’ daily functioning. But even with the assistance of technology, mistakes happen. Your staff should always double-check entries and reconcile bank accounts to ensure that transactions entered into accounting software are complete and accurate.
  3. Do we consistently report unrelated business income (UBI)? IRS officials have cited “failing to consider obvious and subtle” UBI tax issues as the biggest tax mistake nonprofits make. Many organizations commonly fail to report UBI — or they underreport this income. Be sure to follow guidance in IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations. And if you need more help, consult a tax expert with nonprofit expertise.
  4. Have we correctly classified our workers? This is another area where nonprofits commonly make errors in judgment and practice. You’re required to withhold and pay various payroll taxes on employee earnings, but don’t have the same obligation for independent contractors. If the IRS can successfully argue that one or more of your independent contractors meet the criteria for being classified as employees, both you and the contractor possibly face financial consequences.
  5. Do we back up data? If you don’t regularly back up accounting and tax information, it may not be safe in the event of a fire, natural disaster, terrorist attack or other emergency. This data should be backed up automatically and frequently using cloud-based or other offsite storage solutions.

 

If your accounting and tax policies and processes aren’t quite up to snuff and potentially put your organization at risk of making serious errors, don’t despair. We can help you address these shortcomings. Contact Langdon & Company today!

© 2019

What Nonprofits Need to Know About the New Tax Law

Pam Williams0 Comment

The number of taxpayers who itemize deductions on their federal tax return — and, thus, are eligible to deduct charitable contributions — is estimated by the Tax Policy Center to drop from 37% in 2017 to 16% in 2018. That’s because the recently passed Tax Cuts and Jobs Act (TCJA) substantially raises the standard deduction. Many not-for-profit organizations are understandably worried about how this change will affect donations. But this isn’t the only TCJA provision that affects nonprofits.

Donors have fewer incentives

In addition to reducing smaller-scale giving by shrinking the pool of people who itemize, the TCJA might discourage major contributions. The law doubles the estate tax exemption to $10 million (indexed for inflation) through 2025. Some wealthy individuals who make major gifts to shrink their taxable estates won’t need to donate as much to reduce or eliminate their potential estate tax.

UBIT takes a bigger bite

The new law mandates that nonprofits calculate their unrelated business taxable income (UBTI) separately for each unrelated business. As a result, they can’t use a deduction from one unrelated business to offset income from another unrelated business for the same tax year. However, they can generally use one year’s losses on an unrelated business to reduce their taxes for that business in a different year. The TCJA also includes in UBTI expenses used to provide certain transportation-related and other benefits. So, the unrelated business income tax (UBIT) a nonprofit must pay could go up.

High compensation risks new tax

Nonprofits with highly compensated executives may now potentially face a 21% excise tax. The tax applies to the sum of any compensation (including most benefits) in excess of $1 million paid to a covered employee plus certain large payments made to that employee when he or she leaves the organization, known as “parachute” payments. The excise tax applies to the amount of the parachute payment less the average annual compensation.

Bond interest exemption revoked

The TCJA repeals the tax-exempt treatment for interest paid on tax-exempt bonds issued to repay another bond in advance. An advance repayment bond is used to pay principal, interest or redemption price on an earlier bond prior to its redemption date.

Be informed

Note that other rules and limits may apply. We can provide you with a detailed picture of the new tax law and explain how it’s likely to affect your organization. Contact Langdon & Company for more info.

© 2018

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New Tax Law Impacts Retirement Benefits

Pam Williams0 Comment

As you’re likely aware, Congress passed and the president signed into law a new tax bill in December. The technical name of the act is rather long and unwieldy, so it’s commonly referred to by an earlier and simpler title: the Tax Cuts and Jobs Act (TCJA). Naturally, most of the TCJA’s provisions have to do with income taxes. But it also impacts retirement benefits.

Loan balances

The new law gives a break to plan participants with outstanding loan balances when they leave their employers. Ordinarily, participants with outstanding loans who fail to make timely payments after separation from an employer are deemed to have received a distribution in the amount of that outstanding balance. Under pre-TCJA law, they could, however, roll that amount (assuming they have sufficient funds available) into an IRA without tax penalty if they do so within 60 days.

Under the TCJA, beginning in 2018, former employees in this situation will have until their tax return filing due date (including extensions) to move funds equal to the outstanding loan balance into an IRA or qualified retirement plan without penalty. They’re given the same opportunity if they’re unable to repay a loan because of the plan’s termination.

Roth conversions

The TCJA also restricts individuals’ ability to recharacterize conversion contributions to a Roth IRA as if they were still making contributions to a traditional IRA. In other words, beginning in 2018, individuals can no longer convert a traditional IRA to a Roth IRA and then later recharacterize that Roth IRA contribution back to a traditional IRA contribution to essentially undo the conversion. However, taxpayers can still recharacterize new Roth IRA contributions as traditional contributions as long as they do it by the applicable deadline and meet all other rules.

This provision may portend additional 401(k) restrictions in years to come. Roth 401(k)s are favored by revenue-seekers in Congress, because the after-tax nature of contributions to Roth plans — IRAs or 401(k)s — enables the federal government to collect more tax revenue in the present, pushing off into the future the drain on tax revenue because of the tax-free nature of Roth withdrawals.

Future possibilities

Indeed, the federal government will likely continue to look at changes to retirement plans as a means of generating revenue. One proposed, but eventually eliminated, provision would have required that all contributions to any defined contribution plan sponsored by the same employer (including mandatory employee contributions to a defined benefit plan) be aggregated when determining whether contributions to a participant’s account satisfy IRC Sec. 415(c) limits. This would have raised $1.7 billion over a 10-year period, the Committee’s staff estimated.

Similarly, Congress considered imposing a low ($2,400) cap on pre-tax 401(k) contributions, requiring the balance of the total $18,000 limit on contributions ($18,500 for 2018) to be made on an after-tax basis. Congress could someday revisit this concept and push employers to convert traditional 401(k) plans to Roth plans.

Far beyond

The TCJA goes far beyond tax rate reductions. Let our firm help your organization fully understand how both its tax liability and employee benefits are affected by the new law. Contact Landgon & Company today!

© 2018

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Now Available – 2018 Income Tax Withholding Tables

Pam Williams0 Comment

01_12_18_106439659_ftnp_560x292_1.jpgEmployers and employees: Withholding tables reflecting Tax Cuts and Jobs Act (TCJA) changes are now available, and employees could see paycheck changes by February. The IRS has issued new income tax withholding tables for 2018 and advised employers to begin using them as soon as possible, but no later than Feb. 15. Find the IRS’s information release at http://bit.ly/2D2ihJn and the percentage method tables themselves in IRS Notice 1036 at http://bit.ly/1Ne91he Answers to frequently asked questions about using the new tables can be found at http://bit.ly/2D5iWJm

Out tax department is happy to answer any questions you may have regarding the new tax laws. Please contact us at (919) 662-1001 or send us an email here.

How to Amend a 1040

Pam Williams0 Comment

by Susan Dean

Have you discovered an error after filing your personal income tax return? Did you forget to report income or claim deductions? Have you received a “corrected” tax reporting document such as a Corrected Form 1099? What should you do if you fall into one of these categories? Depending on the circumstances, you may need to amend your tax return.

To amend your Form 1040, U.S. Individual Incofrom Susanme Tax Return, you should file a Form 1040X, Amended U.S. Individual Income Tax Return. Form 1040X will become your new tax return, changing your original return to include any new information.

Page one of Form 1040X is a summary of your 1040 information, both as previously filed and what you are currently reporting.  Column A reports the “Original amount” as reported on a prior Form 1040 (or prior 1040X). This is the amount(s) you are updating or “amending.” Column C reports the “Corrected amount” or the amount that should have been reported on the original return, the amount you are updating. That leaves Column B. Column B shows the “Net change” between Column A and Column C. Column B reports the difference in what was reported (Column A) and what should have been reported (Column C). Form 1040X gives a visual comparison of your 1040, both before and after the change(s). The form shows the increase or decrease to your taxable income and/or tax liability.

When filing an amended tax return, you must explain the reason for the amendment. This explanation is reported on Part III, Explanation of changes. In this section you should communicate to the Internal Revenue Service (IRS) why you are filing Form 1040X. The reason can vary from receiving a late or corrected Form 1099; forgetting to claim a deductible charitable contribution or business expense; reporting additional taxable income; or changing the originally filed filing status. No matter the reason, the IRS wants to know why you are amending and what form(s) and line numbers have changed as well as any supporting schedules that have been affected by the change(s).

Once you have completed Form 1040X by reporting the corrected information, explained the reason for the change(s) and attached any necessary forms and/or schedules, you are ready to sign and file your amended return. Depending on the change in your overall taxable income and/or tax liability, you may owe additional tax to the IRS or you could be due a tax refund. The state you live in and the outcome of your tax liability determines where you file your amended return. Before mailing your amended return, please confirm the correct address in the current year Form 1040X instructions.

Please note if you are amending your federal income tax return, you also may need to amend your state income tax return. Refer to your state income tax return form instructions on when and how to amend your state income tax return or contact your personal certified public accountant.

For more information on amending your Form 1040, please refer to the IRS website and their section on Amended Tax Return Frequently Asked Questions. If you think you may need to amend your personal income tax return and would like further advice on amending or would like to request assistance in amending your personal tax return, please contact our office.

Susan ([email protected]) is a Tax Manager working primarily with closely-held family businesses and corporations.

Overview of Possible FASB Changes in Non-Profit Reporting Rules

Pam Williams0 Comment

Non ProfitThe Financial Accounting Standards Board recently evaluated the way in which non-profit organizations record and report their financial information and is seeking to make changes that would enable charities to provide more accurate financial information to the general public.

To start with, FASB board members have created a draft document that can be used as a formal operating measure to evaluate any organization that is set up to serve the public good.

Continue reading Overview of Possible FASB Changes in Non-Profit Reporting Rules

Why a Non-Profit Should Hire a CPA Firm?

Pam Williams0 Comment

The provisions of the Internal Revenue Code are complex regarding the tax treatment of non-profit donations, transactions and other recognizable events. An experienced Certified Public Accountant (CPA) is trained in the nuances of non-profit accounting and tax returns, and is capable of assisting management with recordkeeping and tax return preparation.

Utilizing a Raleigh CPA allows management to focus on day-to-day operations, and generate additional streams of income.

Continue reading Why a Non-Profit Should Hire a CPA Firm?

Overview of Possible FASB Changes in Non-Profit Reporting Rules

Pam Williams0 Comment

The Financial Accounting Standards Board recently evaluated the way in which non-profit organizations report their financial information and is seeking to make changes that would enable charities to provide more accurate financial information to the general public.

To start with, FASB board members have created a draft document that can be used as a formal operating measure to evaluate any organization that is set up to serve the public good.

Continue reading Overview of Possible FASB Changes in Non-Profit Reporting Rules