Tag Archives: Tax-exempt

Note to Not-For-Profits: Don’t Ignore Sales Tax

Tax magnifying glass

Making assumptions when it comes to sales and use tax is ill-advised for any entity’s approach to compliance.  This is especially the case for not-for-profits.  Exemption from federal income tax can count for nothing in the sales and use tax world, and states are anything but uniform when it comes to exemptions available for not-for-profits.  Even when there are sales and use tax exemptions available for not-for-profits, it’s essential to ensure that all administrative requirements are followed in order to properly claim the exemption.

At the very least, all not-for-profits need to ask themselves three questions when it comes to sales and use tax: What states? What purchases? What sales?

What States?

No entity, not-for-profit or otherwise, will have a sales and use tax payment or collection obligation unless a state has jurisdiction over the entity.  In the state tax world, this concept is known as “nexus.” For sales and use tax, an entity needs to have a physical presence in the state before a state can have jurisdiction to tax it.  Many taxpayers mistakenly interpret the “physical presence” test to mean a substantial permanent presence – for example, having an office in a state.  Clearly, an office location in a state would be considered a physical presence by all states, but many other in-state activities can constitute nexus.  For example, a physical presence can be established by having a telecommuter in a state, having employees temporarily in a state, or having independent contractors in a state performing services for the not-for-profit.

What Purchases?

Once a not-for-profit determines that it has nexus with a state, it must determine if any of its purchases being made in the state are subject to sales tax.  Many states have sales and use tax exemptions for purchases made by not-for-profits, but these exemptions vary significantly in terms of which not-for-profits are exempt and the scope of the purchases that are exempt.  For example, California only provides sales and use tax exemptions for purchases made by entities meeting its rather narrow definition of a “charitable organization.”  Further, if an entity meets that definition, the only purchases that are exempt from sales and use tax are those that are made for the purpose of donation by the organization. All purchases of supplies (such as tools and office supplies) are not exempt.  Under these rules, most associations and membership organizations (i.e., non-IRC 501(c)(3) entities) would be taxable on all of its purchases.

Other states, such as Maryland and Ohio, have broader exemptions on purchases made by not-for-profits, but even in these states the exemption does not apply to all entities that may be exempt from federal income tax.  Further, most states require not-for-profits qualifying for a sales tax exemption to obtain an exemption certificate from the applicable taxing authority, which must be provided to vendors at the time of purchase.

What Sales?

Not-for-profits also need to be aware if its sales of products or services are subject to a state’s sales and use tax.  If a not-for-profit’s sales are subject to sales tax, then it must register to collect and remit sales tax to the state.   Merchandise sold, training materials (i.e. tangible or digital), software applications, access to a database, and subscriptions to publications are items to which not-for-profits need to pay particular attention.  States often have exemptions for certain sales of admissions to events hosted by not-for-profits and sales of food and beverages items.  Sales of merchandise are typically subject to sales and use tax.  This is especially the case when a not-for-profit has a permanent retail store, as opposed to sales that are isolated in nature.  For example, Colorado, Georgia, Illinois, and Pennsylvania generally impose their sales tax on sales made by not-for-profits unless the sales meet the applicable rule pertaining to isolated/occasional sales.

It’s important for not-for-profits to be proactive in the area of sales and use tax.  When activities are expanded to new states, whether from hiring an in-state employee or frequently hosting conferences or seminars in a state, not-for-profits should immediately look into whether it will be making any purchases or sales that may result in a sales tax compliance obligation.  Being reactive can result in penalties, interest, and the practical in-ability to recoup uncollected taxes.

If you have any questions about sales and use tax, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301-231-6200.

A Welcome Break on the Fee for 1023-EZ Application for Tax Exempt Status

check the boxEffective July 1, 2016, the application fee for filing the Form 1023EZ has been lowered to $275. The old fee was $400. That’s a savings of $125, and is a welcome relief to small nonprofits applying for tax exempt status.

The new streamlined Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, was introduced by the IRS in 2014 to provide relief for small nonprofits applying for tax exempt status from having to complete the full Form 1023, Application for Recognition of Exemption Under Section 501(c)(3). The full form is 26 pages long, and the IRS estimates it requires an average of 15 ½ hours to prepare, with 185 hours of other reading and record keeping; compared to 2 ½ pages and 5 ½ hours to prepare the EZ version, with an additional 12 ½ hours reading and record keeping. So the new 1023-EZ form is a winner when it comes to cutting down on paper work and time invested to comply with IRS requirements.

And customer satisfaction rates are way up for the IRS on the Streamlined EZ form compared to the regular long form.

Not every organization is eligible to complete the streamlined EZ form. Here is a summary of the not-so-short list of twenty-six points your organization needs to pass in order to qualify:

  1. Gross receipts (estimated) will be less than $50,000 for each of the succeeding three years,
  2. Did not exceed $50,000 in gross receipts in each of the past three years (if already operating),
  3. Total assets valued at fair market value are less than $250,000,
  4. Were formed under laws in the U.S. (States, territories and possessions),
  5. Have a mailing address in the U.S. (States, territories and possessions),
  6. Are not a successor to, or controlled by, an entity suspended as a terrorist organization,
  7. Are organized as a corporation, unincorporated association, or a trust,
  8. Are not a successor to a for-profit entity,
  9. Are not a previously revoked organization, or a successor to a previously revoked organization, with the exception of a revocation due to not filing a Form 990 series form for three consecutive years,
  10. Are not a church, convention or association of churches,
  11. Are not a school, college or university,
  12. Are not a hospital or medical research organization in conjunction with a hospital,
  13. Are not a cooperative hospital service organization,
  14. Are not a cooperative service organization of operating educational organizations,
  15. Are not a charitable risk pool,
  16. Are not going to be a supporting organization under section 509(a)(3),
  17. Are not going to be providing credit counseling as a substantial part of your activities,
  18. Plan to invest 5% or more of assets in securities or funds that are not publicly traded,
  19. Do not plan to participate in partnerships in which losses would be shared with for profit entities,
  20. Sell carbon credits or carbon offsets,
  21. Are an HMO,
  22. Are an Accountable Care Organization or engage in ACO activities,
  23. Will maintain donor advised funds,
  24. Organized and operated exclusively for testing for public safety,
  25. A private operating foundation,
  26. Applying for retroactive reinstatement of exemption after being automatically revoked.

IRS Issues Guidance on Notification to Operate as a 501(c)(4) Social Welfare Organization

IRS logoThe IRS on July 8, 2016, issued temporary regulations describing how to communicate with the IRS if you are starting a new social welfare organization, also known as a Section 501(c)(4) organization. A new online form, Form 8976, is required to be submitted to the IRS electronically within 60 days after being established.

If you have started or in the process of organizing a social welfare organization, there are other federal and state filings and disclosures that may be necessary, depending on where and how you are operating. This requirement with the IRS has been up in the air for many months now, so this announcement is some solid news for these start-up organizations.

https://www.irs.gov/charities-non-profits/electronically-submit-your-form-8976-notice-of-intent-to-operate-under-section-501c4

IRS Issues Exempt Status Determination Procedure

Zemanta Related Posts ThumbnailOn January 12, the IRS issued Revenue Procedure 2015-9 (See http://www.irs.gov/irb/2015-2_IRB/ar10.html) establishing the procedures the IRS will follow in issuing, revoking, and modifying exempt status determination letters for 2015. It supersedes Revenue Procedure 2014-9.

Pursuant to Revenue Procedure 2015-5, the IRS has also created a Form 1023-EZ “Streamlined Application for Recognition of Exemption under Section 501(c)(3)” (See http://www.irs.gov/uac/About-Form-1023EZ).  To be eligible to complete this streamlined form you must have had annual gross receipts below $50,000 in any of the past three years and project that your annual gross receipts will not exceed $50,000 in any of the next three years. In addition, you must have total assets not in excess of $250,000 and not be formed in a foreign country and meet several other criteria.

501(c)(4)’s – The IRS Takes a New Look

The IRS provides an exemption under Section 501(c)(4) of the IRC for social welfare organizations that are nonprofit in nature and operate exclusively for the promotion of the common good and welfare of a community. The NAACP, AARP, Sierra Club are example of 501(c)(4) entities that are classified as organizations promoting social welfare for the common good and welfare of a community. A 501(c)(4) can technically fund political advertisements as long as the ad is not the primary purpose of the group beyond the social welfare it provides to the community. The amount of political funding provided by 501(c)(4)’s has become more controversial of late given the large amount of funding these groups have spent on political campaigns in recent elections coupled with the undisclosed nature (to the Federal Election Commission anyway) of the funders to the 501(c)(4) organizations.

As highlighted in this article by Rob Stott of ASAE, the IRS is relooking at these rules:

http://associationsnow.com/2014/05/irs-revise-proposed-rule-nonprofit-political-activity/?utm_source=AN%2BDaily%2BNews&utm_medium=email&utm_campaign=20140527%2BTuesday

 

Reprinted with permission. Copyright, ASAE: The Center for Association Leadership, May 23, 2014, Washington, DC

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