Nonprofits are an important part of our communities, providing services to the general public and helping boost our local economies. However, they do have special tax considerations that can impact their financial status and operations. Nonprofits can be impacted by a variety of taxes, including unrelated business income tax (UBIT), real estate tax, and revocation of tax-exempt status. This blog will discuss some of these tax issues and provide you with some information about how they affect nonprofits.
Unrelated Business Income Tax (UBIT)
As tax-exempt organizations, nonprofits operate for a purpose that is charitable or beneficial to the community. However, as they carry out their mission, they engage in certain activities that are not directly related to their exempt purposes and are therefore subject to federal income tax. The IRS defines unrelated business income (UBIT) as net income derived from a trade or business regularly carried on by the organization that is not substantially related to its exempt purpose. UBTI is typically taxed at for-profit business rates, although certain exceptions and modifications under Section 512 and 513 may apply.
Real Estate Tax
Real estate taxes are government-levied payments charged annually on immovable land (usually buildings or homes). These funds are used to fund local services, including roads, schools and community projects. These taxes can be levied on a property’s assessed value, BIR zonal value or the highest value among these. They vary widely from state to state, and can also include a special assessment tax. Nonprofits often need to consider how to generate revenue without affecting their exemption. For example, an organization may lease its buildings to a for-profit entity, in order to generate income for charitable purposes. While this may be an attractive method, it must be done carefully so as not to lose the organization’s tax exemption. In addition, the organization should perform a cost-benefit analysis to determine whether the added real estate tax burden is offset by the rental income generated from the for-profit entity.
Revocation Of Tax-Exempt Status
Revocation of an organization’s tax-exempt status is a painful experience. It means the nonprofit will no longer be able to collect donations from donors or to qualify for state sales and use tax exemptions, among other things. But there are ways to get your exempt status back. The IRS has a process for reinstating an organization’s tax-exempt status after it has been automatically revoked because the organization failed to file annual returns (IRS Forms 990, 990-EZ, 990-N, or 990-PF) for three consecutive years. The reinstatement application process has four different options, based on the type of organization and how long it has been since it was revoked. Each requires a significant level of detail and compliance. The best way to ensure your organization’s exempt status stays in place is to have a qualified attorney and tax advisor help you navigate the process.
Tax-Exempt Organizations
The rules and regulations governing nonprofits and tax-exempt organizations are constantly evolving. In addition to federal tax benefits, nonprofits are also exempt from paying sales and use taxes on goods donated to them or bailed by them. This is an important benefit to nonprofits, as it allows them to make contributions to a cause while avoiding the higher business and occupation (B&O) or retail sales taxes that apply to commercial entities. In some instances, a nonprofit may want to engage in for-profit activities, but these transactions must be carefully planned and implemented to ensure that they will not impact their tax-exempt status. For example, if a nonprofit operates a for-profit entity that conducts a literary event and sells books on behalf of the nonprofit, it must be clear to the IRS that the activity is merely a way for the nonprofit to promote its charitable purposes rather than for-profit profit. Got questions? Priscilla A. Chesler CPA PC is on the forefront of these developments and can help your organization successfully navigate through them. Contact us here today: https://pchesler.com/tax-preparation/
If you’re preparing your 2022 tax return, there are some important updates you need to know. These changes will impact your tax bill and help you get back the most money possible.
The Child Tax Credit Ends
The Child Tax Credit, a popular federal policy that helps millions of parents offset the cost of raising children, expires on December 31, 2022. If no further legislation is enacted before then, the credit will revert back to rules under the American Recovery and Reinvestment Act of 2009 (ARRA), including the phase-out income level, refundable threshold, and maximum amount. As a result, 19 million children will receive a partial credit or none at all this year.
There’s A New Tax On Capital Gains
Capital gains are the profit that comes from selling one or more investments or assets. These profits are taxable and can vary based on the type of asset you sell. The best way to calculate your tax bill is to keep track of the sales you make and the basis for each, plus any qualifying expenses that came with the asset. Then use the information to figure your net capital gain. You can save some cash on the tax bill by deferring some of your gains but be sure to check with your accountant before you do so. For example, if you sell a stock in your small business and defer a portion of the gain to purchase another, you may owe less. However, don’t take this as an invitation to skimp on your taxes or you could end up with a nasty surprise in your next tax bill.
The Tax On Net Investment Income Stays The Same
Net investment income is a broad category that includes a variety of non-business income, such as interest, dividends, rents, royalties, and the profit you earn from trading stocks. It also includes trade or business income, such as from trading financial instruments or commodities. If you earn income from investments – dividends, capital gains, interest, royalties, rents and more – you may owe the tax on net investment income. The tax is 3.8%, and it’s imposed on high-income individuals, estates and trusts who exceed certain income thresholds.
The RMD Table For Retirement Accounts Changed
The IRS created
RMD rules to recapture income taxes on dollars saved in tax-advantaged retirement accounts like IRAs and 401(k) plans, which have accumulated without being taxed. When people reach a certain age, they must start withdrawing these funds to avoid tax penalties and prevent them from using their nest eggs as tax shelters. Starting in 2022, owners and beneficiaries of retirement accounts will use new tables to calculate RMDs. These new tables are being updated to reflect more current life expectancies than the ones used previously.
The Threshold For The 20% Deduction For Pass-Through Income Increased
If you own a business that produces
qualified business income (QBI), you can take a 20% deduction on that income. This is known as the pass-through deduction and applies to partnerships, LLCs, and sole proprietorships. The size of this deduction varies depending on your taxable income and the nature of your business. It also depends on whether you have W-2 employees or own business property. The new tax law sets a threshold for this deduction and increases it each year, but that doesn’t mean you have to reach it to claim it. It’s important to understand the threshold and how it works so you can use it correctly.
Got Questions?
Proper accounting practices are among the most important parts of managing your business. No matter if you’re a small business or a nonprofit, you need a CPA who is knowledgeable about the industry. At
Priscilla A Chesler CPA PC, we are a full-service accounting firm that strives to provide personalized solutions for your business or nonprofit. Contact us today and let us be the accounting solution that fits your particular needs.
If you are a self-employed entrepreneur, you may be considering becoming an
S corporation. S-Corps enjoy pass-through taxation, meaning that their profits are not taxed twice. However, this advantage isn’t as simple as it sounds. In order to take full advantage of these advantages, your business must first properly run payroll and accurately report profits and losses on tax returns.
Tax Savings
S Corporations are pass-through entities, which means that they don’t pay federal corporate taxes and instead pass their profits and losses through to their shareholders. Shareholders then report this information on their personal income tax returns. S Corporations also allow owners to take a 20% qualified business income deduction, which can be an important tax break. In addition, owners can use their S Corp earnings to cover a variety of costs, such as health insurance or home office expenses.
Limited Liability
S-corps are generally managed by a board of directors, which oversees corporate formalities and major decisions. They can also impose discipline on rogue employees and veto business decisions that may harm the company. In addition, they can issue stock, allowing them to attract investors who are willing to pay for shares of the corporation. As such, an S-corp can effectively serve as a legal structure that offers the tax advantages of partnerships and the limited liability protections of corporations.
Growth Opportunities
One of the biggest advantages of being an S-Corp is its ability to raise capital. This is especially important when you’re a small business owner looking to expand your operations. The IRS has made it easier for companies to grow by requiring only that they comply with a number of guidelines. These include having no more than 100 shareholders and ensuring that each shareholder is a bona fide resident of the United States.
Accounting
In addition to the tax advantages, S corps offer businesses several legal protections. One is personal liability protection. S corporations are legally distinct from their shareholders, so if the business goes belly up, they cannot access their personal assets. This helps prevent creditors from claiming them for debts. This is a big draw for many
small businesses.
Call The Professionals
Proper accounting practices are among the most important parts of managing your business. No matter if you’re a small business or a nonprofit, you need a CPA who is knowledgeable about the industry. At
Priscilla A Chesler CPA PC, we are a full-service accounting firm that strives to provide personalized solutions for your business or nonprofit. Contact us today and let us be the accounting solution that fits your particular needs.