Training Module 7: Nonprofit Association

Tax Compliance

Presented by the

Southern Early Childhood Association

Topics to be Presented…

• Reasons associations seek tax-exempt status

• Reasons to grant tax-exempt status

• The 501(c)(3) IRS classification

• Applying for tax-exempt status

• Annual filings and tax compliance

• Independent contractors

• Deductibility of meeting expenses

Even tax-exempt organizations must pay taxes under certain conditions…

1) Unrelated Business Income Tax (UBIT)

2) Local taxes, sales taxes, and other miscellaneous taxes

3) Employment taxes

Reasons for Organizations to Seek Tax-Exempt Status

• Receive dues without taxation

• Accumulate income tax-free • Meet state or local requirements for exemption• Receive threshold deduction re: UBIT • Encourage public officials to work with the

organization• Receive tax-deductible charitable contributions • Qualify for nonprofit postal permits

* DISCUSSION *

• If your organization is currently tax-exempt, what were the reasons for which it sought that status?

• If your organization is not currently tax-exempt, would it be beneficial for you to seek that status now?

Why are nonprofit organizations tax-exempt?

• Nonprofits organizations relieve the government’s burden for supplying services to citizens.

• Nonprofit organizations benefit society.

• Taxing nonprofit organizations would be difficult and counter-productive for the government.

* DISCUSSION *

• What aspects of your association’s mission or purpose qualify it for tax-exempt status?

• In what ways does your association relieve the government’s burden and benefit society?

Criteria for 501(c)(3) Tax Exemption

1) Organization must be organized and operated for purposes beneficial to the public interest.

2) Organization must not be organized for profit.

3) Organization must have a written plan for its own dissolution.

4) Organization must protect itself against private benefit from its operations.

Criteria for 501(c)(3) Tax Exemption

5) The organization’s activities must not provide specific services for individual members.

6) No substantial part of the organization’s activities may attempt to influence legislation.

7) The organization must not participate in any political campaign on behalf of any candidate.

* DISCUSSION *

• How well does your organization conform to the seven criteria for 501(c)(3) tax-exempt status listed in this presentation?

• What could be done to ensure that your association does not violate these criteria in the future?

Tax-Exempt Associations and the IRS:

A Timeline

• Phase One: Starting Out

• Phase Two: Applying to the IRS

• Phase Three: Annual Filings

• Phase Four: Ongoing Compliance

• Phase Five: Significant Organizational Changes

Phase I: Starting Out

A. Articles of Incorporation or charter

B. Bylaws

C. Employer Identification Number (EIN)

D. Registration for Charitable Solicitation

* DISCUSSION *• Do your organization’s Articles of

Incorporation and bylaws conform to the 501(c)(3) standards for stating organizational purpose?

• Does your association have an Employer Identification Number?

• Does your state require your association to file paperwork in order to solicit charitable contributions within its borders?

Phase II: Applying to the IRS

A. Application criteria

B. IRS Form 1023

C. IRS Form 8718

D. IRS Processing

E. IRS Determination Letter

* DISCUSSION *

• Based on the process described in “Phase II,” is there anything that your association should have done differently in its application for tax-exempt status?

• Do you have proper documentation for each and every step?

Phase III: Annual Filings

A. IRS Form 990

B. Unrelated Business Income Tax (UBIT)

C. Employment Taxes

D. Independent Contractors

* DISCUSSION *

• Does your association maintain a schedule and checklist for its annual filings with the IRS?

• Who is in charge of managing the filing process, and what type of oversight is employed by your association to ensure compliance with IRS regulations?

Phase IV: Ongoing Compliance

A.Important Employment Tax Forms• IRS Form W-4, Employee’s Withholding

Allowance Certificate, and I-9, Employment Eligibility Verification

• IRS Form W-2, Wage and Tax Statement • IRS Form W-3, Transmittal of Wage and Tax

Statements • IRS Form 945, Annual Return of Withheld

Federal Income Tax

Phase IV: Ongoing Compliance

B. Reporting Charitable Contributions

C. Public Disclosure

* DISCUSSION *

• Who manages your association’s tax process as it relates to employees?

• Are all required forms filed in a timely manner with the IRS and clearly documented in association files?

• Do any improvements in this process need to be made?

Phase V: Organizational Changes

A. Significant organizational changes that could jeopardize compliance

B. Material changes

Independent Contractors

• Organization must specify if an employee is an “independent contractor.”

• Organizations usually do not pay employment taxes on independent contractors.

• Separate IRS forms must be filed for independent contractors.

* DISCUSSION *

• Does your organization employ independent contractors?

• Who is responsible for managing these contractors?

• Is all required IRS documentation for independent contractors kept current and on file with the association?

Deductibility of Meeting Expenses for Attendees

• Meeting expenses for attendees may be deducted as “ordinary and necessary business expenses” if attendance is for professional reasons.

• Items typically deductible include: registration fees, travel, transportation, lodging, incidental expenses

• Compliance: Expenses are not deductible if combined with travel for pleasure, or if spouses accompany you

Guidelines to Ensure Meetings Will be Tax-deductible for Attendees

• Conference program should be planned to reflect the professional interests of attendees.

• Brochures and other promotional materials should emphasize its professional aspects.

• The major portion of the conference program should be business-related.

• Organizations should not, however, publicly promote their meeting as tax-deductible.

* DISCUSSION *

• What measures are taken by your organization to meet IRS requirements so that meeting attendees have the potential to deduct their expenses?

• What changes could be made to ensure your association’s compliance with the standards by which meeting expenses may be deducted?

Resources consulted for this presentation:

• www.BoardSource.org • www.irs.gov/charities • Jerald Jacobs. Association Law Handbook. 3rd

Edition, Washington, DC: American Society of Association Executives, 1996.

• Jeffrey Tenenbaum. Association Tax Compliance Guide. Washington, DC: American Society of Association Executives, 2000.

Any final thoughts or questions?