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Nonprofit Exemptions

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© RSM US LLP. All Rights Reserved. FSU ALUMNI ASSOCIATION – SEMINOLE CLUB TAX ISSUES April 22, 2016
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Page 1: Nonprofit Exemptions

© RSM US LLP. All Rights Reserved.

FSU ALUMNI ASSOCIATION – SEMINOLE CLUB TAX ISSUES

April 22, 2016

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© RSM US LLP. All Rights Reserved.

Presented By:

Juliana KreulTax Manager - [email protected]

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Agenda

• Benefits of being a 501(c)(3)• Group Exemption• Sales Tax • Best Practices

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BENEFITS OF BEING A 501(C)(3)

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Why Should I Be a 501(c)(3)

• Ability to accept contributions and donations that are tax-deductible to the donor

• Exemption from federal and/or state corporate income tax• Possible exemption from state sales and property tax

(varies by state)• Ability to apply for grants and other public or private

allocations available only to IRS-recognized, 501(c)(3) organizations

• Potentially higher thresholds before incurring federal and/or state unemployment tax liabilities

• The public legitimacy of IRS recognition• Discounts on US Postal bulk-mail rates and other services

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GROUP EXEMPTION

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What is a Group Exemption

• The IRS sometimes recognizes a group of organizations as tax-exempt if they are affiliated with the central organization.− Avoids need for each organization to apply for

exemption individually.− Group exemption letter has the same effect as an

individual exemption letter except that it applies to more than one organization.

− Administrative convenience • No need for separate applications for exemption

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Reason for a Group Exemption

• An administrative convenience for both the IRS and organizations with many affiliated organizations− Subordinates do not have to file separate applications

(exceptions to be addressed later)− IRS does not have to process separate applications

• Subordinates do not receive individual exemption letters

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What are Central and Subordinate Organizations

• Groups of organizations with group exemption letters have a “head” or main organization – the Central Organization (FSU Alumni Association)

• Central Organization generally supervises or controls many chapters – Subordinate Organizations (Seminole Clubs)

• Subordinate Organizations typically have similar structures, purposes, and activities

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What Happens After Group Exemption is Granted

• Once the IRS grants the Group Exemption, the FSU Alumni Association is responsible for:1. Ensuring that its current subordinates (each club)

continue to qualify as exempt;2. Verifying that any new subordinates are exempt; and3. Updating the IRS on an annual basis of new

subordinates, subordinates no longer to be included, and subordinates that have changed their name and address.

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Verification of Group Exemption

The FSU Alumni Association, holding a group exemption (rather than the IRS) determines which organizations are included as subordinates under its group exemption ruling.

Therefore, you should verify with the FSU Alumni Association that you are included on the list as a subordinate.

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Donor Verification

The separate Seminole Clubs generally are not listed on the IRS website Exempt Organizations Select Check Tool.

Donors should verify with the FSU Alumni Association whether the particular Seminole Club is included in the FSU Alumni Association’s group ruling.

Donors may rely upon FSU Alumni Association verification with respect to deductibility of contribution to subordinates covered in a § 501(c)(3) group exemption ruling.

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Filing Requirements Under a Group Exemption

• A group exemption letter does NOT change the filing requirements for exempt organizations.

• The FSU Alumni Association AND EACH Seminole Club must file Forms 990 (990-EZ or 990-N) unless they meet a filing exception.

• The FSU Alumni Association must file its own separate return but may also file a group return on behalf of some or all of its subordinates

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What is a Group Return

• A Group return is a separate return from the central organization

• The Group Return may include only those exempt subordinates that have authorized the central organization in writing to include them in in the return

• FSU Alumni Association has NOT elected to file a Group Return. Therefore, ALL Clubs must file their own separate return

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Subordinate responsibilities

• Each subordinate must have its own EIN

• Central organization should determine the process for preparing returns:− Central organization prepares and files− Subordinate prepares and files

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Limits for Filing Requirements

Status Form to File

Gross receipts normally < $50,000 990-N

Gross receipts < $200,000, and Total assets < $500,000

990-EZ or 990

Gross receipts ≥ $200,000, orTotal assets ≥ $500,000

990

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What if a Subordinate Organization Fails to File Its Separate Return

• Automatic Revocation occurs when an exempt organization that is required to file an annual return or submit a 990-N does not do so for 3 consecutive years − The organization automatically loses its federal

exempt status− Effective on the original filing due date of the third

annual return

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What if a Subordinate Organization has its Tax-Exempt Status Automatically Revoked

• Under the Pension Protection Act of 2006, if an organization’s tax-exempt status is revoked for failure to file for three years, the only way it can get that status reinstated is to apply for exemption. This rule applies regardless of whether the organization was originally required to apply for exemption (was included in a group exemption)

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Reinstating Tax-Exempt Status

• The law prohibits the IRS from undoing a proper automatic revocation and does not provide for an appeal process.

• An automatically revoked organization must apply to have its status reinstated

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How to Apply for Reinstatement

• Streamlined retroactive reinstatement− Organizations that were eligible to file Form 990-EZ

or 990-N− Have not previously had their tax exempt status

revoked− Complete and submit Form 1023 or Form 1023-EZ

with the appropriate user fee not more than 15 months after the date of the organization’s Revocation Letter

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How to Apply for Reinstatement (continued)

• Retroactive reinstatement (after 15 months) − Complete Form 1023 with the appropriate user fee

• Write “Revenue Procedure 2014-11, Retroactive Reinstatement” on top of Form 1023

− Include a statement confirming the organization has filed the required returns for those three years and for any other taxable years

− Must include a reasonable cause statement to establish reasonable cause for failure to file annual returns *

− File properly completed and executed paper annual returns for the three consecutive years that caused the revocation and any following years. • Write “Retroactive Reinstatement” on these returns

− The IRS will not impose penalty for failure to file

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What is a Reasonable Cause Statement

• Establishes that an organization exercised ordinary business care and prudence in determining and attempting to comply with its annual reporting requirement. The statement should have a detailed description of all the facts and circumstances about why the organization failed to file, how it discovered the failure, and the steps it has taken or will take to avoid or mitigate future failures.

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SALES TAX

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Sales Tax

• Your club/organization is responsible for its own sales tax

• Being tax exempt for federal purposes DOES NOT automatically exempt you from sales tax and other taxes− 501(c)(3) is FEDERAL income tax status− Sales tax is STATE regulated

• Being included in a Group exemption DOES NOT mean you no longer have to worry about your organization’s sales tax and other tax

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Sales Tax Exemption

The requirements for the a sales tax exemption vary per state.

• In order to be sales tax exempt in your state, EACH CLUB will need to contact the state agency that manages sales taxes. − This is the State Department of Revenue in some states

• The agency should have a form for your to request exemption from sales tax and you can indicate you are exempt from income taxes either under your own exemption or under the FSU Alumni Association group exemption and include that information with your application.

• If you are already exempt, you will need to provide this information upon renewal.

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BEST PRACTICES

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Best Practices for Non-Profits

While it might not be required by law to adopt particular standards of conduct, certain practice may help your organization operate transparently, prudently, and ethically.

Many organizations find that a benchmark guide is helpful.− Many states have Principles & Practices guidelines for

Nonprofits

Grantmakers and donors may also look at your accountability practices to identify how well-run and effective your organization is.

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Governance

• Independent Board − Minimum number

• How involved is the Board of Directors?− Job description− Review the financials and the annual return

• What policies are in place to prevent conflicts misuse of assets− Financial policies− Conflict of interest policy− Whistleblower policy− Fundraising policies− Solicitation and Acceptance of Gifts

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Accounting

• Recommend a good accounting program, such as QuickBooks.− Able to categorize sources of income and related expense

• Track events separately− Able to identify charitable donations versus event revenue− Able to identify direct and indirect expenses− This also helps you to identify which events are profitable

and which are not• Internal controls for handling finances• Solicitation of Contributions

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Internal Controls

• Create a paper trail− Pay expenses by check− Offer an official signed receipt for cash donations

received− Maintain a list of the details of all deposits− Reconcile the bank statement monthly

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Internal Controls (continued)

• Involve multiple people− Treasurer writes the checks, the President signs them− Paper receipts are numbers, tracked by the

Treasurer, reviewed by the President− Deposits are prepared by Treasurer and taken to the

bank by the Secretary− Treasurer reconciles the bank statement, the

President reviews it

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Internal Controls (continued)

• Financial reporting is reviewed by a committee and the board− Regular meetings are held to review financial

information− Actual results are compared to budget and prior year− Questions are asked and clear answers are provided− Internal financials are consistent with the annual

Form 990

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Management

• If applicable, what systems are in place for recruiting, training, managing employees and volunteers?− Health & safety− Compensation− Supervision− Insurance

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Miscellaneous Requirements

• Solicitation of Contributions registration− Requirements vary by state

• Maintaining Public Support Status− Generally required to receive at least on-third of its

support from contributions from the general public− If less than 33 1/3% but more than 10%, must pass

the Facts & Circumstance Test

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This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. RSM US LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person.

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