Tag: business tax

Uh-Oh: What to Do If Your Organization Loses Tax Exempt Status

It’s with a sinking feeling that you learn your nonprofit’s tax exempt status has been denied. You’ve got two tasks before you now: figuring out how it happened so that you can prevent it from happening again in the future, and appealing the decision to get your nonprofit’s tax exempt status active again.

Tax-Exempt Status: What Does It Mean?

Non-profit status is granted to your organization by the state. It is a business designation, not a tax designation. Once your organization has non-profit status, you can then apply for tax-exempt status.

Reasons Why You Can Lose Tax Exempt Status

The IRS lists six reasons why you can lose your tax exempt status. These fall into the following categories:

  1. Deriving private benefit from charitable activities: This is a big no-no with the government. As a nonprofit organization, the benefits derived from your organization must flow to the groups you say you serve. You shouldn’t personally profit from the activities or the organization.
  2. Lobbying: Nonprofits must not engage in political lobbying.
  3. Political activity: Nonprofits must also refrain from any other political activities.
  4. Unrelated business income: Income that’s derived from avenues not directly related to your nonprofit’s mission or activities can also be cause for losing tax exempt status.
  5. Failing to file an annual report: Even if your organization doesn’t have to pay an annual income tax, in order to maintain your tax exempt status, the government requires specific information be reported each year. Failure to file an annual report can be problematic because it contains much of the required information to maintain tax exempt status.
  6. Deviating from tax-exempt purposes: An organization sets forth specific reasons why it should be tax-exempt. Deviating from these purposes, or changing too much of what it does, is another reason why it can lose tax-exempt status.

Regaining Tax Exempt Status

It goes without saying that losing your tax exempt status is a serious problem. It shows that someone in your organization isn’t filing the right documents or that the group has lost sight of its mission. It may be time to meet with your leadership team and make sure everyone is on the same page.

After the dust settles and you can figure out where the mistakes occurred that led to losing nonprofit status, it’s time to roll up your sleeves and regain your status.

The National Council on Nonprofits recommends that you consult the IRS’s publication, Revenue Procedure 2014-11, and consult with your accounting firm for help regaining your nonprofit status. You must also clearly communicate with your members and donors, who may worry that their donations or dues aren’t being used properly. Let them know what is going on and the steps you are taking to fix the problem.

Going forward, be sure to take the following steps to safeguard your nonprofit status:

  • Maintain accurate records in a central location, and update those records periodically.
  • File all paperwork at the state and federal levels by the due date. Leave nothing to chance. Make it a priority!
  • Screen all potential new projects according to the rubric of how well they meet your current mission. Be tough. If they don’t fit the mission, you may need to pass on them.
  • Make sure that no one at your organization derives monetary gain from their work at the organization. Make it clear as part of your HR policies that such actions aren’t tolerated.
  • Hire external counsel, such as a CPA firm, to review your annual reports and your record keeping. An annual audit conducted by a reputable firm is a necessity.

It can be disheartening to learn that your organization has lost its nonprofit status. Take steps to rectify the situation and prevent future problems, clearly communicate those steps to your constituents, and soon you should be back on track to serve the people or causes that need you the most.

Beck & Company Certified Public Accountants and Business Advisors

At Beck & Company, our team of certified public accountants can guide you on how to apply for and maintain your tax-exempt status. We provide auditing services, consulting, business advice, workshops, and seminars for the nonprofit world. For more information, contact us or call 703-834-0776.

Business Tax-Time Problems Grow from Past Mistakes

Some of the biggest problems small business owners have during income tax filing season are the result of mistakes and oversights they made during the previous year.

Sloppy record-keeping, even when accounting software is used, is a big reason why owners struggle at tax time. Another problem is that owners often short-change themselves by not being sure they’re taking all the deductions they’re entitled to. That can also be the result of haphazard records, but it also may come from not knowing some tax law basics.

USE SOFTWARE TO HELP, NOT HURT

Many owners use software that’s designed to help small businesses keep their books easily. They run into problems when they don’t input their income and expense figures properly. Some businesses have not taken the time to really learn how to use a record-keeping program. They hand us a disk or thumb drive, and they’ve handed us a mess. It’s the high-tech equivalent of what accountants ruefully call shoebox or shopping bag clients, ones who show up with a chaotic pile of receipts that a CPA has to then sort through. When an accountant gets a disorganized disk or drive, it has to be straightened out before a return can be completed. The solution is to become more of an expert at using the software, or outsource accounting functions to input your numbers.

PAY ATTENTION TO WHAT YOU’RE PAYING

A common problem for business owners who use vehicles or homes for both business and personal reasons is they forget to keep track of what they spend for each. For example, an owner who gasses up his car may forget to reimburse himself for the portion of the purchase that should go toward personal use. The reverse can happen: An owner doesn’t think to take a tax deduction for the portion that should go toward the business.

Owners who use their cars partly for the business, or who have a home office, should go over all the expenses from the previous year and be sure that they don’t miss any chances for deductions. With a vehicle, insurance, gas, repairs and garage rental can all be deductible. An owner needs to determine the percentage that the vehicle was used for business and then multiply that by the expenses.

For example, if the car was used 60 percent for business, then 60 percent of deductible expenses can be listed on a tax return. It’s also possible to use the IRS’ mileage allowance to figure a deduction. With a house or apartment, there are similar rules for computing a deduction. In this case, square footage is used. Repairs, mortgage interest or rent, insurance, utilities and maintenance costs can all be deducted.

For more information, an owner should look at IRS Publication 587, Business Use of Your Home, or Publication 463, Travel, Entertainment, Gift and Car Expenses. You can find them on the IRS website, www.irs.gov.

PAY NOW OR PAY MORE LATER

If business owners are concerned about spending money during the recession, have shied away from consulting an accountant during the course of the year. Then, at tax time, their unanswered questions turn into problems. For example, if an owner didn’t ask a CPA for help in making decisions on big equipment purchases, the business could lose out on deductions designed to help small companies. The cost of a few hours with an accountant may be small in comparison to the amount the business ends up paying the government in taxes.

The solution is to get to an accountant or outsource accounting functions early, and get the books in order by a qualified professional.

Secrets Shared for IRS Tax Audits

If your business has ever found itself involved in an audit by the Internal Revenue Service (IRS) you know that this is a painful process. The time and expense alone can be devastating. Knowing in advance what can trigger an audit and what auditors are looking for if you do get audited can help you structure your systems to clearly demonstrate the validity of your business practices.

There is a wealth of tax audit information available but one resource we have found extremely helpful is the Small Business Notes website. This site provides various Audit Techniques Guides based on the industry you are in. These guides contain audit examination techniques, common and unique industry issues, business practices, industry terminology and other information to assist examiners in performing examinations.

Be aware that the audit guides are written so that auditors know what practices to look for in auditing a business. However, the guides are available to any business owner and are a gold mine of information to help you operate your business from a tax standpoint to keep the auditors away from your door. The guides are relatively technical since they are written for auditors. Sharing the information with your accountant may be wise to obtain clarification on some of the issues they raise.