Frequently Asked Questions
Yes. It is essential to discuss accounting systems, budgets, entity structure, and much more with a CPA before starting a business. Without seeking advice from a CPA, you could be making decisions that could end up hurting you financially or legally.
Rubino can provide the following financial statement services:
- Preparation: A preparation is intended for business owners’ use only to manage the business. For financial statement preparation services, Rubino will not verify the accuracy or completeness of the information, and we are not required to issue a formal report on the financial statements.
- Compilation: A compilation is intended for use by outside parties who may appreciate the business’s association with a CPA without requiring a level of assurance on the accuracy of your financial statements. For compilation services, Rubino is required to read the financial statements in light of the financial reporting framework being used and consider whether the financial statements appear appropriate in the form and are free from obvious misstatements.
- Review: A review is intended for use by outside parties with limited assurance on the accuracy of financial statements. A review is appropriate as an organization grows and seeks larger, more complex levels of financing and credit. During a review, Rubino will perform analytical procedures, inquiries, and other procedures to obtain “limited assurance” on the financial statements, and review is intended to provide a user with a level of comfort on their accuracy.
- Audit: An audit is intended to provide outside parties with a higher level of comfort on the accuracy of the financial statements. An audit is typically appropriate and often required when an organization is seeking complex or high levels of financing and credit. In an audit, Rubino is required to obtain an understanding of the organization’s internal control and assess fraud risk. In addition, Rubino is also required to corroborate the amounts and disclosures included in the financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures, and other procedures.
We recommend keeping all tax returns and support for the income and deductions claimed on those returns for seven years after the date the return was filed.
Nonprofit organizations, and in some cases for-profit organizations, are required to have a Single audit performed under the Uniform Guidance or a Uniform Guidance Audit if they incur Federal expenditures of $1,000,000 (effective 10/01/2024) or more in a fiscal year.
Yes, in certain cases, commercial or for-profit entities may be subject to the audit requirements of the Uniform Guidance. For instance, HHS regulations state the following:
Recipients and subrecipients that are commercial organizations and incur more than $1,000,000 (effective 10/01/2024) of Federal expenditures under have two options regarding audits:
- A financial-related audit (as defined in the Government Auditing Standards, GPO Stock #020-000-00-265-4) of a particular award in accordance with Government Auditing Standards, in those cases where the recipient receives awards under only one HHS program; or, if awards are received under multiple HHS programs, a financial-related audit of all HHS awards in accordance with Government Auditing Standards; or
- An audit that meets the requirements contained in this subpart (45 CFR Part 75.501)
Outsourced Accounting
Answer: Outsourcing accounting services offers several benefits, including cost savings, access to specialized expertise, improved accuracy and compliance, scalability, and the ability to focus on core business functions. It will also provide timely and accurate financial information, which is crucial for making informed business decisions. Coupling these services with an effective CFO provides the greatest impact.
Answer: No, you will not lose control over your finances. A reputable accounting outsourcing provider will work closely with you to ensure that their services align with your company’s financial policies and goals. You will retain oversight and decision-making authority while benefiting from the provider’s expertise and resources.
Answer:
Yes, accounting outsourcing services are flexible, and you can choose to outsource specific functions that meet your needs. For example, you might outsource payroll processing while keeping general ledger and financial reporting functions in-house.
Answer:
Outsourced accounting service providers stay up to date with the latest financial regulations and accounting standards. They update internal processes, ensuring that your company remains compliant with generally accepted accounting principles, and other rules and regulations such as Uniform Guidance and FAR. This reduces the risk of financial errors and penalties.
Answer: Outsourced accounting can positively impact your business operations by providing timely and accurate financial information, improving cash flow management, and enhancing your financial planning and analysis function. Clear communication about the transition and the benefits it brings can help mitigate any concerns employees might have. Your CFO should be excited by the prospect of accurate data. If you don’t have a CFO, you should consider outsourcing this service as well.
Answer: An outsourced accounting provider offers comprehensive support, including handling day-to-day accounting tasks, providing strategic financial advice and ensuring compliance. They act as an extension of your team, providing ongoing support and expertise to help your business succeed. Coupling outsourced accounting services with outsourced CFO services combines accurate financial reporting with financial planning and analysis (FP&A).
Answer: Reputable outsourced accounting providers implement robust security measures to protect your financial data. This includes data encryption, secure servers, regular security audits, and strict confidentiality agreements. Ensure that the provider you choose has strong security protocols in place to safeguard your sensitive information.
Outsourced Accounting FAQs:
Answer: Transitioning to an outsourced accounting provider involves several steps: assessing your accounting needs, selecting the right provider, planning the transition process, and communicating with your employees. Your chosen provider will guide you through the transition, ensuring a smooth and efficient process with minimal disruption to your business operations.
Answer: Outsourced accounting providers use advanced accounting software and tools to ensure accurate and timely financial reporting. They provide detailed financial statements, performance metrics, and analysis, helping you make informed business decisions and improve overall financial management.
Outsourced Controller FAQs:
Answer: An Outsourced Controller collaborates with your internal team, including bookkeepers, accountants, and executives, to streamline financial processes and improve efficiency.
Answer: An Outsourced Controller focuses on managing financial reporting, compliance, and internal controls, whereas a CFO is more involved in financial strategy, fundraising, and high-level decision-making.
Outsourced CFO FAQs:
Answer: Absolutely. They collaborate with your in-house accountants, bookkeepers, and financial advisors to ensure smooth financial operations.
Answer: Yes, by optimizing cash flow, improving profitability, and providing strategic financial guidance, an Outsourced CFO can significantly enhance business growth and efficiency.
Nonprofit Audit
Answer: Audit requirements vary by state and funding sources. Some states require audits based on revenue thresholds, and some grantors or donors may require them as a condition for funding.
Answer:
- Audit: The highest level of assurance, involving detailed testing and verification.
- Review: Limited assurance, with analytical procedures and inquiry, but less testing.
- Compilation: Basic financial statement preparation with no assurance.
Preparation & Process FAQs:
Answer:
To prepare for an audit, ensure that:
- Financial records are organized and up to date.
- Bank reconciliations are complete.
- Grant documentation and donor records are readily available.
- Internal controls and policies are documented.
- The board has reviewed prior financial statements.
Answer: Commonly requested documents include:
- Financial statements (balance sheet, income statement, etc.)
- Bank reconciliations
- Payroll records
- Grant agreements and funding reports
- Board meeting minutes
- Internal control policies
- Supporting documentation for transactions, including receipts and disbursements
Answer: The audit timeline varies but typically takes 4-8 weeks, depending on the complexity of the organization and the availability of documentation.
During the Audit FAQs:
Answer: The audit process typically includes:
- Planning & Risk Assessment – Understanding the nonprofit’s operations and identifying risks.
- Fieldwork – Reviewing records, testing transactions, and evaluating controls.
- Drafting Reports – Preparing financial statements and audit reports.
- Finalization & Presentation – Discussing findings with management and the board.
Answer:
- Communicate with the auditor on timeline expectations
- Assign a staff member to be the audit liaison.
- Provide requested documents on time.
- Ensure financial records are accurate and complete.
- Respond promptly to auditor inquiries.
After the Audit FAQs:
Answer: If deficiencies are identified, the auditor will provide recommendations for improvement. These may include adjusting internal controls, improving record-keeping, or refining financial procedures.
Answer: Yes, after the audit is complete, you will receive an audited financial statement and a governance letter, and if applicable, management letter, highlighting any concerns or suggestions for improvement.
Answer: Most nonprofits conduct audits annually, especially if required by state law, donors, or funding agencies.
Compliance & Best Practices FAQs:
Answer: An audit:
- Enhances financial credibility.
- Improves internal controls and financial oversight.
- Helps secure funding by demonstrating transparency.
- Ensures compliance with legal and regulatory requirements.
Answer: Nonprofit audits typically follow Generally Accepted Accounting Principles (GAAP) and may adhere to Uniform Guidance for federal grant compliance.
Specifically for Revenue recognition: ASU 2018-08—Not-for-Profit Entities (Topic 958): Clarifying the scope and the accounting guidance for contributions received and contributions made
Answer: The board should:
- Review the audit report and management letter.
- Address any recommendations for improvement.
- Ensure ongoing financial transparency and compliance.
Uniform Guidance FAQs:
Answer:Nonprofit organizations, and in some cases for-profit organizations, are required to have a Single audit performed under the Uniform Guidance or a Uniform Guidance Audit if they incur Federal expenditures of $1,000,000 effective (10/01/2024) or more in a fiscal year.
Government Contractors
Answer: The Defense Contract Audit Agency (DCAA) is responsible for auditing Department of Defense (DoD) contracts and ensuring that government contractors comply with federal regulations, particularly the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS).
DCAA compliance is critical for government contractors because failure to adhere to these standards can lead to penalties, loss of contracts, or disqualification from future contract opportunities. DCAA audits focus on verifying the accuracy and allowability of costs charged to government contracts, ensuring that the contractor’s accounting systems can properly segregate direct and indirect costs
Answer: Indirect costs are expenses that cannot be directly attributed to a specific government contract or project but support the overall operation of the business. Common examples include utilities, administrative salaries, and office supplies.
In government contracting, indirect costs are categorized into different pools, such as overhead, general and administrative (G&A), and fringe benefits, which are then allocated to contracts based on a consistent and logical method. Proper management and allocation of indirect costs are essential to ensure compliance with government regulations and avoid under- or overcharging the government.
Answer:
- A fixed-price contract is an agreement where the contractor agrees to deliver a product or service for a set price. The contractor assumes most of the risk because they are responsible for any costs that exceed the agreed-upon price.
- A cost-reimbursement contract, on the other hand, allows the contractor to be reimbursed for allowable, allocable, and reasonable costs associated with fulfilling the contract. However, cost-reimbursement contracts often come with more oversight, including strict auditing and reporting requirements to ensure compliance with FAR and other regulations.
Answer: Allowable costs are expenses that are reasonable, allocable to the contract, and compliant with the specific terms of the contract and FAR Part 31. Common examples of allowable costs include direct labor, materials, subcontractor costs, and indirect costs that support contract performance.
Unallowable costs, on the other hand, are expenses that cannot be billed to the government under any circumstances. Examples include entertainment, lobbying expenses, fines and penalties, and personal expenses. Unallowable costs must be segregated in the contractor’s accounting system to avoid charging them to the government, which can lead to audit findings or penalties.
Answer: A compliant accounting system is critical for government contractors because it ensures that costs are accurately recorded, allocated, and reported in line with FAR and DCAA requirements. A compliant system must:
- Segregate direct and indirect costs.
- Identify and track allowable and unallowable costs.
- Provide timely, accurate financial reports.
- Support audits and other reviews by government agencies.
DCAA audits will evaluate whether a contractor’s accounting system meets these standards. Failure to maintain a compliant system can result in contract delays, disallowance of costs, or loss of government business.
Answer: Incurred Cost Submissions (ICS) are required for government contractors with cost-reimbursement contracts or other types of contracts that require cost data reporting. The ICS details all costs incurred by the contractor during the fiscal year, including direct and indirect costs.
Contractors are required to submit their ICS within six months after the end of their fiscal year. The DCAA reviews these submissions to ensure that the costs billed to the government are allowable, allocable, and reasonable. Failure to submit an accurate and timely ICS can lead to penalties, disallowed costs, or increased scrutiny in future audits.
Answer: Allowable costs are expenses that are reasonable, allocable to the contract, and compliant with the specific terms of the contract and FAR Part 31. Common examples of allowable costs include direct labor, materials, subcontractor costs, and indirect costs that support contract performance.
Unallowable costs, on the other hand, are expenses that cannot be billed to the government under any circumstances. Examples include entertainment, lobbying expenses, fines and penalties, and personal expenses. Unallowable costs must be segregated in the contractor’s accounting system to avoid charging them to the government, which can lead to audit findings or penalties.
Answer: A forward pricing rate is an estimate of future indirect costs that a contractor anticipates over the life of a contract. These rates are typically negotiated with the government in advance of contract performance and are used to establish billing rates for cost-reimbursement contracts.
Accurate forward pricing rates are important because they help both the contractor and the government plan for the financial aspects of contract performance. Therefore, forward pricing rates must be reasonable, realistic, and justifiable.
Answer: A timekeeping system is an essential component of a government contractor’s accounting system because it tracks the hours worked by employees on various projects or contracts. For labor costs to be allowable under government contracts, timekeeping systems must:
- Record time daily.
- Properly allocate labor hours to the appropriate contract or indirect pool.
- Ensure that employees certify the accuracy of their time records.
Inadequate timekeeping systems can lead to audit findings, penalties, or disallowed labor costs. A compliant timekeeping system ensures that labor costs are accurately recorded and allocated, minimizing the risk of noncompliance.
Answer: The Cost Accounting Standards (CAS) are a set of standards designed to ensure uniformity and consistency in cost accounting practices across government contracts. Key CAS requirements include:
- Consistent treatment of costs (CAS 401).
- Allocation of costs based on their beneficial or causal relationship to cost objectives (CAS 403).
- Treatment of direct labor, materials, and indirect costs in a consistent manner (CAS 418).
For contracts exceeding certain thresholds (currently $2 million), compliance with CAS is mandatory. Non-compliance with CAS can lead to penalties, increased scrutiny in audits, and potential contract loss.
Answer: FAR Part 31 governs the principles for determining the allowability, allocability, and reasonableness of costs charged to government contracts. It applies to all contracts, regardless of size, and provides guidelines on allowable and unallowable costs.
Cost Accounting Standards (CAS), on the other hand, are more specific rules that apply to larger contracts. CAS focuses on the methods and practices used to allocate costs, ensuring that costs are consistently treated across all government contracts.
While FAR Part 31 applies universally to government contracts, CAS only applies to contracts that meet specific thresholds. However, both sets of regulations must be adhered to by contractors, and non-compliance can result in serious repercussions.
Answer: Contract closeout is the process of completing all the necessary administrative and financial tasks associated with a government contract once the work is finished. This process includes ensuring that all costs are correctly billed, all deliverables are submitted and accepted, and any remaining payments or adjustments are made.
From an accounting perspective, contractors must ensure that:
- All allowable costs have been billed.
- Final indirect rates are applied.
- Final financial reports and incurred cost submissions are filed.
Failure to properly close out a contract can delay final payments, lead to disallowed costs, or create challenges in future contract negotiations.
Answer: Yes, small businesses can seek help from specialized accounting firms, consultants, and outsourced accounting services that focus on government contracting. Many of these providers have expertise in DCAA compliance, FAR regulations, and CAS requirements, and they can help small businesses navigate the complexities of government contract accounting.
In addition, the Small Business Administration (SBA) and other government organizations offer resources and training programs to help small businesses understand and comply with government contract regulations.
Answer: A compliant accounting system for government contracting should have the following features:
- Ability to segregate direct and indirect costs.
- Support for tracking allowable and unallowable expenses.
- Real-time tracking of project costs.
- Automated timekeeping integration.
- Reporting capabilities that comply with FAR, CAS, and DCAA requirements.
Additionally, the system should be scalable to accommodate the growth of your business and the complexity of future contracts.
International Tax Services
General FAQs:
Answer: International tax compliance refers to the adherence to tax laws and regulations by individuals and multinational businesses in the countries in which they operate, have income, own assets, or have tax obligations.
Answer: Yes, U.S. citizens and Green Card holders must file a U.S. tax return regardless of where they live. The U.S. taxes its citizens on their worldwide income.
Answer:
Foreign income earned by U.S. taxpayers is subject to U.S. taxation. However, taxpayers may be able to reduce their U.S. tax liability through the Foreign Tax Credit (FTC) or Foreign Earned Income Exclusion (FEIE).
Answer:
The FEIE allows U.S. citizens and residents living abroad to exclude a certain amount of their foreign-earned income from U.S. taxes, provided they meet certain requirements.
Corporate/Business FAQs:
Answer:
Businesses can mitigate their risks and financial burdens associated with international operations by leveraging tax treaties to prevent double taxation, claiming foreign tax credits, using international tax structures, and optimizing transfer pricing policies while ensuring compliance with global tax regulations.
Answer:
Transfer pricing regulations govern transactions between related entities of multinational companies to ensure that they are conducted at arm’s length and that profits are properly allocated. These regulations aim to prevent profit shifting and tax avoidance.
Filing and Documentation FAQs:
Answer:
There are myriads of foreign reporting and/or disclosure forms to report on when US taxpayers have interest in foreign assets or accounts. Depending on the type of foreign asset and ownership interest there may be filing requirement as described below.
- FBAR (Foreign Bank Account Report): A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FinCEN Report 114, FBAR, if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
- Form 8938 (Statement of Specified Foreign Financial Assets): This form must be filed if you own foreign financial assets exceeding certain thresholds. The thresholds vary based on your filing status and whether you live in the U.S. or outside.
It’s important to note that you may need to file both forms depending on your specific situation.
- Other forms and reporting requirements: U.S. taxpayers with ownership/interest in foreign corporations, partnerships, or trusts, including family-owned businesses, and/or having foreign investments, like mutual funds personal retirement accounts, insurance policies and pension accounts, are subject to additional reporting obligations on their U.S. tax returns.
These may include reporting and filing Form 5471 for ownership in foreign corporations or Form 3520 for foreign trust interests.
Answer: The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers to report foreign financial assets if they exceed certain thresholds. It also requires foreign financial institutions to report accounts held by U.S. taxpayers.
Tax Treaty FAQs:
Answer: A tax treaty is a bilateral international agreement between two countries intended to prevent double taxation and to establish rules for taxation in cross-border situations. Residents of certain countries may be entitled to reduced tax rates or exemption from income tax withholding under a tax treaty between their country and the U.S.
Answer: Tax treaties significantly impact your tax filing by providing various benefits and clarifying tax obligations for individuals and businesses with international income. These agreements between the U.S. and other countries aim to prevent double taxation and offer tax advantages.
Many of the individual states of the United States tax the income of their residents. Some states honor the provisions of U.S. tax treaties, and some states do not. Therefore, you should consult the tax authorities of the state in which you live to determine the tax treaty benefits are applicable in your case.
Expatriation and Residency FAQs:
Answer: Renouncing U.S. citizenship has several significant tax implications and includes being subject to an exit tax if you meet certain criteria. You will also have to file a final U.S. tax return Form 8854 for the year of renunciation, covering the period up to your renunciation date. You must be fully tax compliant for the five years preceding renunciation, including filing all required U.S. tax returns and paying any outstanding tax debts. It’s crucial to carefully consider these implications and ensure full tax compliance before proceeding with renunciation.
Answer:
Residency for tax purposes is determined by several factors, primarily focusing on an individual’s physical presence and intentions. The two main tests used to determine tax residency are the Green Card test and the Substantial Presence Test.
For state tax residency, the rules can vary, but generally most states consider you a resident if you spend 183 days or more in that state and have a permanent place of abode there.
Cross-Border Tax Planning FAQs:
Answer: You can minimize your tax liability through strategic planning, such as leveraging tax treaties, claiming foreign tax credits, using international tax structures, optimizing transfer pricing policies and taking advantage of foreign earned income exclusion. Remember that while these strategies can help minimize tax liability, it’s crucial to ensure compliance with all applicable laws and regulations.
including filing all required U.S. tax returns and paying any outstanding tax debts. It’s crucial to carefully consider these implications and ensure full tax compliance before proceeding with renunciation.
Answer: Yes, generally you can either deduct foreign income taxes paid as an itemized deduction or claim them as a Foreign Tax Credit (FTC) to reduce your U.S. tax liability. Not all foreign taxes can be deducted on a U.S. tax return. While taxpayers have the option to deduct certain foreign taxes, there are specific limitations and exclusions to be aware of.
Estate and Gift Tax FAQs:
Answer: All worldwide assets are included in your estate if you are a U.S. citizen or resident for estate tax purposes. Non-residents are taxed only on U.S.-situs assets.
Answer: Yes, U.S. taxpayers must report foreign gifts exceeding certain thresholds using Form 3520.
Compliance and Penalty FAQs:
Answer: Penalties can be severe for failing to file forms such as FBAR, FATCA, or Form 5471. Penalties range from monetary fines to criminal charges.
Answer:
Yes, you can correct past mistakes or omissions through voluntary disclosure programs, such as the Streamlined Filing Compliance Procedures.
Consult with international tax experts to develop a comprehensive tax planning strategy tailored to your specific situation.
Nonprofit Tax
General Nonprofit Tax FAQs:
Answer: Technically speaking, these are not identical terms. Tax-exempt generally refers to the provisions in the Internal Revenue Code that describe a federal income tax exemption. Nonprofit generally refers to the provisions in a state law that authorize the formation of a nonprofit nonstock corporation. While these are often used interchangeably in conversation or in general topics, there are distinctions that matter on the federal and state levels.
Answer: The type of tax-exempt organization you are forming determines the application form, so understanding the mission of the organization will help determine the approach.
501(c)(3) organizations are focused on charitable, religious, educational, and scientific missions. To apply for tax-exempt status as a typical public charity under 501(c)(3), your organization would file Form 1023 (or Form 1023-EZ for eligible smaller organizations).
Social welfare organizations seeking exemption under section 501(c)(4) or other organizations seeking exemption under other 501(c) subsections (like social clubs or business leagues) file the 1024 exempt application series (1024-A and 1024).
Answer: Yes, unless the organization meets a specific exception, most nonprofits are required to file a return annually. Churches, governmental units, and certain political organizations are some of the main exceptions. The filing requirements for an organization depend on the type of organization and its annual gross receipts. Most nonprofits file Form 990, Form 990-EZ, or Form 990-N (e-Postcard).
TIP: Check the top right of your IRS determination letter to see if it indicates a Form 990 requirement:
Answer: The difference between these forms is the amount of information the IRS requires on each. The Form 990 requires the most amount of information, the Form 990-EZ requires much less, and the Form 990-N requires very little information. Eligibility for the smaller forms is limited to certain gross receipts and/or total assets thresholds:
- Form 990 is required for organizations with gross receipts of $200,000 or more, or total assets of $500,000 or more.
- Form 990-EZ is for organizations with gross receipts of less than $200,000 and total assets of less than $500,000.
- Form 990-N (e-Postcard) is for the smaller organizations with gross receipts of $50,000 or less.
NOTE: Always confirm your organization’s requirements with a tax advisor, as there are oftentimes exceptions to every rule. For example, certain supporting organizations are not able to file the 990-N (e-Postcard) even if gross receipts do not exceed the form’s threshold.
Donations and Contributions FAQs:
Answer: Yes, donations made to a 501(c)(3) tax-exempt organization are generally tax-deductible for donors, as long as no goods or services are received in return for the contribution.
Answer: It’s best practice. Nonprofits must provide written acknowledgment for any single donation of $250 or more. For smaller donations, it’s still good practice to provide receipts for record-keeping purposes.
Answer: A donation receipt should include:
- The name and address of the nonprofit
- The date of the donation
- The amount of cash donation or a description of the donated item
- A statement that no goods or services were provided in return (or a description and amount of what was provided)
Nonprofit Compliance FAQs:
Answer: If a nonprofit fails to file a required Form 990 for three consecutive years, the IRS will automatically revoke its tax-exempt status. The organization will then need to reapply for tax-exempt status.
Answer: Most states require nonprofits to register before soliciting donations within their borders. State laws vary, so it’s essential to review your state’s requirements and speak with an advisor.
Answer: Yes. Nonprofits are subject to the same payroll tax requirements as for-profit entities, including withholding and paying Social Security, Medicare, and federal/state unemployment taxes for employees.
Unrelated Business Income (UBI) FAQs:
Answer: Unrelated Business Income is income from a trade or business that is regularly carried on and not substantially related to the nonprofit’s exempt purpose. Examples include income received from selling advertising or job boards generated from publications and website ads.
Answer: Yes. Nonprofits must report UBI by filing Form 990-T if gross receipts from the activity are $1,000 or more for the tax year. Directly connected expenses may be reported to offset the income, but organizations will pay 21% federal income tax on their net income.
The 990-T is the federal filing requirement; the state filing requirement for UBI should also be reviewed and varies by state, but oftentimes gets reported on the state corporate returns (e.g., DC is the Form D-20; Maryland is the Form MD-500; and Virginia is the Form VA-500).
Answer: Tax-exempt organizations are allowed to have UBI, but they must keep these activities to an insubstantial level as compared to the rest of their activities. This is not strictly defined, but most in practice say 10-15% is a safe level to not exceed what would be considered substantial.
In some cases, earning income through an unrelated business income stream is a good thing. While it does create filing requirements and income tax liabilities, if the outcome is money going back to support the organization’s activities, it could be worth it.
If your organization would rather not create UBI:
- Ensure that any revenue stream and business activity is substantially related to the organization’s exempt purpose or meets an exception to the income tax application.
- Structuring activities as one-time or infrequent events rather than ongoing operations.
- Create a corporate subsidiary to conduct the business activities separately.
- Reviewing IRS guidelines to determine what qualifies as UBI.
Grants and Fundraising FAQs:
Answer: Generally, grants given to a nonprofit to further its tax-exempt purpose are not taxable. However, the grant must be used for the organization’s exempt purposes. If the grant is used for non-exempt purposes, it may be subject to tax or jeopardize the organization’s tax-exempt status.
Answer: Yes. Nonprofits must report gross income and expenses from fundraising events on the Statement of Revenue. If you file a Form 990 and the gross receipts from all fundraising events exceed $15,000, then details of the events are reportable on Schedule G. The IRS requires disclosure of income from ticket sales, goods and services provided to donors/attendees, auctions and noncash prizes, sponsorships, and other fundraising activities.
Financial Reporting and Recordkeeping FAQs:
Answer: Nonprofits should keep detailed records of:
- Donations and grants
- Expenses and disbursements
- Payroll and employee records
- Annual tax filings
- Meeting minutes
- Articles of incorporation
- Bylaws and any amendments
- Policies and handbooks
Answer: The IRS generally recommends keeping financial records for at least 7 years. Key documents, such as tax-exempt status determination letters, governing documents, 501(h) elections, etc., should be kept permanently.
Volunteers and Employees FAQs:
Answer: Volunteer stipends and reimbursements are taxable if they represent compensation for services or are not made under an accountable plan. Small, non-cash gifts (such as a turkey or ham at the holidays) are generally not taxable. However, cash, cash equivalents (like gift cards), or substantial non-cash benefits are taxable. Ensure that any payments comply with IRS guidelines.
Answer: Yes. Nonprofits that pay an independent contractor $600 or more in a year for their services must provide the contractor with a 1099-NEC form and also send a copy to the IRS by January 31 of the year following when payment was made.
TIP: Make sure to get their tax information using a W-9 form before you pay them.
Answer: No. If an individual is performing work that would normally be done by a paid employee, they must be classified as an employee and receive appropriate wages. Misclassification can lead to penalties. In fact, if a volunteer is receiving cash or significant perks, this can potentially risk making them an unpaid employee, requiring W-2s and tax withholding.
State and Local Compliance FAQs:
Answer: It’s likely you may have a state filing, such as an annual report or charitable registration, at a minimum. Here, it makes sense to divide up state returns between two types: state income tax returns and all other state filings. Nonprofits file state income tax returns if they have federal income tax and the state they have nexus with taxes UBI (reported on a Federal Form 990-T).
For other state filings, while the requirements vary, many states do require nonprofits to file some type of annual report or charitable registration. The requirements to file vary based on the domicile of the organization, the type of nonprofit, the specific activities, and where those are conducted. It’s best to reach out to a tax advisor or legal counsel about your specific set of facts.
Answer: It’s possible. Sales tax exemptions vary by state and are generally only offered to certain types of nonprofits. Nonprofits that are eligible need to apply for a sales tax exemption, and the exemption from tax is generally only on purchases related to the organization’s exempt purpose. Nonprofits that sell goods or services may still need to collect and remit sales tax to the applicable state. To get a more definitive answer from your tax advisor, you will need to know the specific goods or services, the amounts of the sales, the states in which these activities are being conducted, and the timeframe.
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