Islip + Company, CPAs

Fun fact: How to plug in to tax savings.

Many not-for-profits supplement their usual income-producing activities with sponsorships or advertising programs. Although you’re allowed to receive such payments, they’re subject to unrelated business income tax (UBIT) unless the activities are substantially related to your organization’s tax-exempt purpose or qualify for another exemption. So it’s important to understand the possible tax implications of income from sponsorships and advertising. What is sponsorship? Qualifi...ed sponsorship payments are made by a person (a sponsor) engaged in a trade or business with no arrangement to receive, or expectation of receiving, any substantial benefit from the nonprofit in return for the payment. Sponsorship dollars aren’t taxed. The IRS allows exempt organizations to use information that’s an established part of a sponsor’s identity, such as logos, slogans, locations, telephone numbers and URLs. There are some exceptions. For example, if the payment amount is contingent upon the level of attendance at an event, broadcast ratings or other factors indicating the quantity of public exposure received, the IRS doesn’t consider it a sponsorship. Providing facilities, services or other privileges to a sponsor such as complimentary tickets or admission to golf tournaments doesn’t automatically disallow a payment from being a qualified sponsorship payment. Generally, if the privileges provided aren’t what the IRS considers a substantial benefit or if providing them is a related business activity, the payments won’t be subject to UBIT. But when services or privileges provided by an exempt organization to a sponsor are deemed to be substantial, part or all of the sponsorship payment may be taxable. What is advertising? Payment for advertising a sponsor’s products or services is considered unrelated business income, so it’s subject to tax. According to the IRS, advertising includes: Messages containing qualitative or comparative language, price information or other indications of value, Endorsements, and Inducements to buy, sell or use products or services. Activities often are misclassified as advertising. Using logos or slogans that are an established part of a sponsor’s identity is not, by itself, advertising. And if your nonprofit distributes or displays a sponsor’s product at an event, whether for free or remuneration, it’s considered use or acknowledgment, not advertising. Complex rules The rules pertaining to qualified sponsorships, advertising and unrelated business income are complex and contain numerous exceptions and situation-specific determinations. Contact us with questions. 2018

Under the TCJA, employees can no longer claim the home office deduction. But if you run a business from your home or are otherwise self-employed, this deduction may still be available to you. You might qualify if part of your home is used exclusively and regularly for administrative or management activities and you don’t have another fixed location where you conduct these activities. You also might qualify if you physically meet with clients/customers there or you use a storage area in your home exclusively and regularly for business. Contact us for details.

IRS rules governing private foundations are complex and include many exceptions, which is why your foundation needs to write and follow a detailed conflict-of-interest policy. Taking this proactive step can help you avoid potentially costly public and IRS attention. Casting a wide net Conflict-of-interest policies are critical for all not-for-profits. But foundations are subject to stricter rules and must go the extra mile to avoid anything that might be perceived as self-dea...ling. Specifically, transactions between private foundations and disqualified persons are prohibited. The IRS casts a wide net when defining disqualified persons, including substantial contributors, managers, officers, directors, trustees and people with large ownership interests in corporations or partnerships that make substantial contributions to the foundation. Their family members are disqualified, too. In addition, when a disqualified person owns more than 35% of a corporation or partnership, that business is considered disqualified. Avoiding dangerous transactions Prohibited transactions can be hard to identify because there are many exceptions. But, in general, you should ensure that disqualified persons don’t engage in the following transactions with your foundation: Selling, exchanging or leasing property, Making or receiving loans or extending credit, Providing or receiving goods, services or facilities, or Receiving compensation or reimbursed expenses. Disqualified persons also shouldn’t agree to pay money or property to government officials on your behalf. Facing the consequences What happens if you violate the rules? Your foundation’s manager and the disqualified person may be subject to an initial excise tax (5% and 10%, respectively) of the amount involved and, if the transaction isn’t corrected quickly, an additional tax of up to 200% of the amount. Although liability is limited for foundation managers ($40,000 for any one act), self-dealing individuals enjoy no such limits. In some cases, private foundations that engage in self-dealing lose their tax-exempt status. Private foundations that run afoul of the IRS usually have good intentions. You may assume, for example, that transactions with insiders are acceptable so long as they’re fair or benefit your foundation. Unfortunately, this isn’t the case. Most activities defined by the IRS as self-dealing regardless of whom or what they reward are off-limits. If you’re unsure about whether a transaction might violate IRS rules, please contact us. 2018

Do you still need to worry about the individual alternative minimum tax (AMT)? A repeal had been proposed, but it wasn’t included in the final version of the Tax Cuts and Jobs Act (TCJA). The act will, however, reduce the number of taxpayers subject to the AMT. Now is a good time to familiarize yourself with the changes and see if there are any steps you can take during the last several months of the year to avoid the AMT or at least minimize any negative consequences. To learn about the TCJA’s impact on the AMT and assessing your AMT risk for 2018, contact us.

Auctions have long been lucrative fundraising events for not-for-profits. But these events come with some tax compliance responsibilities. Acknowledging item donations If you auction off merchandise or services donated to your charity, you should provide written acknowledgments to the donors of the auctioned items valued at $250 or more. You won’t incur a penalty for failing to acknowledge the donation, but the donor can’t claim a deduction without substantiation, which could... hurt your ability to obtain donations in the future. Written statements should include your organization’s name and a description but not the value of the donated item. (It’s the donor’s responsibility to substantiate the donated auction item’s value.) Also indicate the value of any goods or services provided to the donor in return. Other rules Donors of services or the use of property may be surprised to learn that their donations aren’t tax-deductible. Alert these donors before they make their pledges. Also inform donors of property such as artwork that tax law generally limits their deduction to their tax basis in the property (typically what they paid for it). If you receive an auction item valued at greater than $500 and within three years sell the property you must file Form 8282, Donee Information Return, and provide a copy to the original donor. Form 8282 must be filed within 125 days of the sale. Substantiation for winning bidders A contribution made by a donor who also receives substantial goods and services in exchange such as the item won in the auction is known as a quid pro quo contribution. To take a charitable deduction, winning bidders at a charitable auction must be able to show that they knew the value of the item was less than the amount paid. So provide bidders with a good faith estimate of the fair market value of each available item before the auction and state that only the amount paid in excess is deductible as a charitable donation. In addition, your nonprofit is required to provide a written disclosure statement to any donor who makes a payment of more than $75 that’s partly a contribution and partly for goods and services received. The failure to provide the disclosures can result in penalties of $10 per contribution, not to exceed $5,000 per auction. Plan ahead If you plan to hold a fundraising auction, don’t wait until the last minute to think about tax compliance. Contact us: We can help. 2018

Looking for the perfect bookkeeper is something like looking for an ideal mate. You’ll want to think hard about your organization’s needs before you start searching for, and commit to, the person who’ll handle your day-to-day accounting functions. Define the role Before advertising the position, define the role. Crafting a detailed job description that outlines responsibilities will help you attract qualified candidates and give you a consistent yardstick with which to meas...ure them. Common bookkeeper responsibilities include: Preparing and recording accounts payable, accounts receivable and cash receipts, Tracking expenses, Reconciling bank statements, Posting accounts to the general ledger, and Preparing for year-end financial audits. If you’ll be relying on your bookkeeper to send donor acknowledgments, order supplies or handle any other clerical duties, spell out those duties in the job description. Ensure a good fit Not-for-profits have special bookkeeping challenges that for-profit businesses don’t. At the very least, you want a bookkeeper who understands there are differences, such as accounting for pledges, donated goods and services, and restricted donations. Candidates also must be: Knowledgeable about accounting basics, Willing to learn your organization’s accounting specifics, Attentive to details, Deadline-oriented, and Computer-literate. Finally, because your bookkeeper will handle cash, financial records and proprietary information, potential hires must be trustworthy and above reproach. Conduct thorough background and credit checks on anyone you’re seriously considering, including following up on any references. Get what you need Many organizations hire a bookkeeper because other staff members don’t have the necessary accounting skills. If you’re in that situation, you may wonder how you can judge the accounting acumen of bookkeeper candidates. We can help you define the role and provide advice on hiring the bookkeeper that meets your needs. 2018

The S corporation business structure offers many advantages, including limited liability for owners and no double taxation (at least at the federal level). But not all businesses are eligible - and, with the new 21% flat income tax rate that now applies to C corporations, S corps may not be quite as attractive as they once were. Tax comparison The primary reason for electing S status is the combination of the limited liability of a corporation and the ability to pass corpora...te income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income once at the corporate level and again when distributed to the shareholder. Instead, S corp tax items pass through to the shareholders’ personal returns and the shareholders pay tax at their individual income tax rates. But now that the C corp rate is only 21% and the top rate on qualified dividends remains at 20%, while the top individual rate is 37%, double taxation might be less of a concern. On the other hand, S corp owners may be able to take advantage of the new qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI. You have to run the numbers with your tax advisor, factoring in state taxes, too, to determine which structure will be the most tax efficient for you and your business. S eligibility requirements If S corp status makes tax sense for your business, you need to make sure you qualify - and stay qualified. To be eligible to elect to be an S corp or to convert to S status, your business must: Be a domestic corporation and have only one class of stock, Have no more than 100 shareholders, and Have only allowable shareholders, including individuals, certain trusts and estates. Shareholders can’t include partnerships, corporations and nonresident alien shareholders. In addition, certain businesses are ineligible, such as insurance companies. Reasonable compensation Another important consideration when electing S status is shareholder compensation. The IRS is on the lookout for S corps that pay shareholder-employees an unreasonably low salary to avoid paying Social Security and Medicare taxes and then make distributions that aren’t subject to payroll taxes. Compensation paid to a shareholder should be reasonable considering what a nonowner would be paid for a comparable position. If a shareholder’s compensation doesn’t reflect the fair market value of the services he or she provides, the IRS may reclassify a portion of distributions as unpaid wages. The company will then owe payroll taxes, interest and penalties on the reclassified wages. Pros and cons S corp status isn’t the best option for every business. To ensure that you’ve considered all the pros and cons, contact us. Assessing the tax differences can be tricky especially with the tax law changes going into effect this year. 2018

When school lets out, kids participate in a wide variety of summer activities. If one of the activities your child is involved with is day camp, you might be eligible for a tax credit! Dollar-for-dollar savings Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2018, the maximum expenses allowed for the cr...edit are $3,000 for one qualifying child and $6,000 for two or more. Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 24% tax bracket, $1 of deduction saves you only $0.24 of taxes. So it’s important to take maximum advantage of the tax credits available to you. Qualifying for the credit A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart. Eligible costs for care must be work-related. This means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. If you participate in an employer-sponsored child and dependent care Flexible Spending Account (FSA), also sometimes referred to as a Dependent Care Assistance Program, you can’t use expenses paid from or reimbursed by the FSA to claim the credit. Determining eligibility Additional rules apply to the child and dependent care credit. If you’re not sure whether you’re eligible, contact us. We can help you determine your eligibility for this credit and other tax breaks for parents. 2018

The federal income tax filing deadline is slightly later than usual this year April 17 but it’s now nearly upon us. So, if you haven’t filed your individual return yet, you may be thinking about an extension. Or you may just be concerned about meeting the deadline in the eyes of the IRS. Whatever you do, don’t get tripped up by one of these potential pitfalls. Filing for an extension Filing for an extension allows you to delay filing your return until the applicable exten...sion deadline, which for 2017 individual tax returns is October 15, 2018. While filing for an extension can provide relief from April 17 deadline stress and avoid failure-to-file penalties, there are some possible pitfalls: If you expect to owe tax, to avoid potential interest and penalties you still must (with a few exceptions) pay any tax due by April 17. If you expect a refund, remember that you’re simply extending the amount of time your money is in the government’s pockets rather than your own. (If you’re owed a refund and file late, you won’t be charged a failure-to-file penalty. However, filing for an extension may still be a good idea.) Meeting the April 17 deadline The IRS considers a paper return that’s due April 17 to be timely filed if it’s postmarked by midnight. Sounds straightforward, but here’s a potential pitfall: Let’s say you mail your return with a payment on April 17, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn’t cleared. You then refile and send a new check. Despite your efforts to timely file and pay, you can still be hit with both failure-to-file and failure-to-pay penalties. To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as: DHL Express 9:00, Express 10:30, Express 12:00 or Express Envelope FedEx First Overnight, Priority Overnight, Standard Overnight or 2Day, or UPS Next Day Air Early A.M., Next Day Air, Next Day Air Saver, 2nd Day Air A.M. or 2nd Day Air. Beware: If you use an unauthorized delivery service, your return isn’t filed until the IRS receives it. See IRS.gov for a complete list of authorized services. Avoiding interest and penalties Despite the potential pitfalls, filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now. We can help you estimate whether you owe tax and how much you should pay by April 17. Please contact us if you need help or have questions about avoiding interest and penalties. 2018

Going green at home can reduce your tax bill in addition to your energy bill, all while helping the environment. To reap all three benefits, you need to buy and install certain types of renewable energy equipment in your home. For 2018, you may be eligible for a tax credit of 30% of expenditures for installing qualified solar electricity generating equipment, solar water heating equipment, wind energy equipment, geothermal heat pump equipment and fuel cell electricity generating equipment. Additional rules and limits apply. To learn more, contact us.

While donations to charity of cash or property generally are tax deductible (if you itemize), donations of time or services aren’t. But you potentially can deduct out-of-pocket costs associated with volunteer work, such as supplies, uniforms, transportation and even travel. To be deductible, the costs can’t be reimbursed or be personal, living or family expenses. And they must be directly connected to the services you’re providing and be incurred only because of your volunteering. Additional rules apply; contact us with questions.

Post-TCJA, certain strategies that were once tried-and-true will no longer save or defer tax. But some will hold up for many taxpayers. And they’ll be more effective if you begin implementing them this summer, rather than waiting until year end. Consider these three: 1) Take steps to stay out of a higher tax bracket, such as accelerating deductible expenses. 2) Bunch medical expenses into 2018 to exceed the low 7.5% of AGI deductibility floor. 3) Sell depreciated investments to generate losses to offset realized gains. Contact us to discuss your midyear planning.