Do Nonprofits Ever Pay Taxes?
 
When you think about a nonprofit, the first thing that often comes to mind is that it is tax-exempt. Most nonprofits are not subject to federal, state, and local income tax.
 
Does that mean nonprofits are completely free of ANY tax liability? The answer to this is likely no – there are still some taxes that a nonprofit might be liable for. If you are considering starting a nonprofit organization, you won’t want to be surprised, so we’ll break it down for you. 
 
Taxes That Do NOT Apply to Nonprofits
 Generally a nonprofit is not subject to income tax at the federal, state, or local level on funds raised in direct association with the organization’s mission.  The reasoning behind this exemption is that it allows more resources to be put toward its cause(s).
 
A nonprofit that qualifies for federal tax-exempt status is also exempt from paying property tax in all 50 states, by law. Sales tax is also often waived for certain transactions related to the organization’s mission, but not always. It depends on the nature and amount of sales activities of the nonprofit.
 
Taxes That Do Apply to Nonprofits
 Sales and use tax may also need to be paid. With sales tax, there is a distinction between paying sales tax on purchases, and collecting and remitting sales tax on sales. A nonprofit may need to pay sales tax on purchases from a vendor depending on the rules of its state and other considerations.
 
On the flip side, if a nonprofit is engaged in a business activity unrelated to its charitable mission and/or involved in sales of taxable items or services to customers, it may be obligated to collect and remit sales tax.
 
It is important to distinguish between these two areas and keep in mind that even if a nonprofit is exempted from paying sales tax on purchases, that exemption does not necessarily extend to collecting and remitting sales tax on outside sales.
 
Another area where a nonprofit might be liable to pay tax would be on what is called Unrelated Business Taxable Income (UBTI). This is income that is unrelated to the nonprofit’s core mission. As an example, a fundraising event to sell merchandise to raise money for equipment that will directly help carry out the entity’s cause would NOT be considered an unrelated activity, despite the sale of items to customers, because the money is going directly towards helping to advance the charitable mission.
 
On the other hand, if that merchandise is sold as part of a trade or business that is regularly carried on by the nonprofit and the proceeds are used to fund general operating costs like payroll or office expenses and not specific program expenses, that income could be considered UBTI because it is not substantially related to the organization’s charitable purpose.
 
If a nonprofit has over $1,000 of UBTI it must file Form 990-T and pay tax on that income. If the nonprofit is structured as a corporation, it will pay the flat 21 percent rate on that income, like the 21 percent tax paid by for-profit corporations.  If it’s set up as a trust it will be taxed at trust rates, the highest of which is 37 percent. Because this is a gray area of the law and subject to some interpretation, it is highly recommended that a nonprofit seeks the advice of a tax professional in navigating the rules and determining if it is subject to UBTI reporting and taxation.
 
So, as you can see, taxes are not completely off the table just because an organization is exempt from federal income tax. Several different types of tax could come into play for a nonprofit, depending on whether it has employees, the nature of its activities, and other considerations.

 If a nonprofit organization hires employees, it will be subject to payroll taxes. Just like employees of for-profit entities, these individuals are required to pay tax on their earnings, and the organization is liable for the employer’s share of the payroll taxes.

 

Recent California Uber IC referendum does not affect small biz.

Uber and Lyft funded a ballot referendum in November’s election that exempts them from a recent state law classifying most workers as employees instead of independent contractors (ICs). The referendum passed by a wide margin.

Changes in IC v. employee classification in one state are often a bellwether for firms in other states. But in this instance, most other employers do not benefit.

The referendum narrowly applied to companies that employ drivers through apps. When certain conditions are met, those companies can treat the drivers as independent contractors.

Other employers in California still must classify most workers using the ABC test, the test used in various versions by most states, which requires employers to prevail on tests A, B and C for a worker to be treated as an IC, as follows:

A.  The worker must clearly be free from the hiring entity’s direction for the work, both in the terms of the contract and in the conduct of the relationship.

B.   The worker does work that is outside the hiring entity’s usual business—e.g., truck drivers who work for a trucking company do not do work outside the scope of the hiring entity’s business, so they are employees. A plumber doing work at a retail store is performing work outside the hiring entity’s usual business.

C.  The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

 

Works Cited

Bookkeepers, A. I. (2021). Recent California Uber IC referendum does not affect small biz. The General Ledger, Vol. 38, No. 1.

 

 

 

The Concept of Independence in Accounting

 

Independence is a key concept in accounting, especially in the assurance or auditing area of accounting. Assurance services are services where a licensed CPA reviews an organization’s financial statements and accounting records and provides an opinion about them. This opinion takes the form of a report that can be shared with third parties such as banks and shareholders. Auditing services are one of many forms of assurance services. 

 

Only a licensed CPA can provide assurance services; this is regulated by the states. A CPA who provides certain assurance services must be independent from the business that it is writing an opinion for. Essentially, independence means that the auditor must be able to do their work objectively and with integrity. And it goes farther. The auditor must not be perceived as having any kind of bias or connection with the business it is auditing. There must be no perception of any impropriety. 

 

To this end, the auditor must not have a relationship with the company’s executives. A CPA cannot, for example, audit her brother’s company.  A CPA cannot be an investor in the company and also be the auditor because of the financial relationship. The audit opinion must not be influenced in any way by a relationship between the auditor and anyone in the company. The CPA must be able to provide an honest, professional, and unbiased opinion when auditing financial statements.

 

Being independent also means the CPA must have a healthy dose of skepticism.  A common phrase in the accounting profession is “Trust, but verify.”

 

Numerous rules abound to protect auditor independence. For example, an auditor cannot be paid on a contingent or commission basis. All practicing CPAs must complete ethics courses every few years, and these almost always include independence scenarios and case studies.

 

If you have any questions about independence, assurance, or auditing, please feel free to reach out any time. 

 SSA letters should get immediate action.

The Social Security Administration (SSA) is just now mailing letters to employers that filed 2019 Forms W-2 with employee names/SSNs that did not jibe with SSA records. Because a mismatch can be caused by typos, unreported name changes, inaccurate or incomplete employer records, or other problems, the SSA letter says:

“This letter does not imply that you or your employee intentionally gave the government wrong information about the employee’s name or SSN. This letter does not address your employee’s work authorization or immigration status. Do not take adverse action against an employee, such as laying off, suspending, firing, or discriminating against that individual, just because this letter identifies a mismatch between his or her SSN or name as reported to us. Those actions could violate state or federal law and subject you to legal consequences.”

If you receive this letter, review it, then verify and correct the inaccurate data. The letter will include an attachment with instructions on how to register for and use Business Services Online (BSO) to view name/SSN mismatches and how to file a W-2C with the IRS.
 
Why “immediate” action?
To make sure your 2020 W-2s are correct so you do not have to file a 2020 W-2C.
 
IRS penalties, too
The SSA shares its data with the IRS, which can impose penalties for:  
·        failure to file timely (information returns with errors are considered information returns not filed);
·        failure to include required information on a W-2
·        incorrect W-2 information (a name and/or SSN that does not match government databases); and for
·        files on paper when required to file electronically.
 
Penalties.
 $280-$560 per inaccurate W-2 (there can be multiple penalties for the same mistake on a W-2).
 
Works Cited
SSA Letters Should Get Immediate Action, American Institute of Professional Bookkeepers. 2021, The General Ledger,Vol. 38, No. 1.