2012 Exempt Organization Tax Update January 13, 2012 Fred Longwood, CPA, MST Tax Manager (202) 419-5116 firstname.lastname@example.org Agenda What is new for 2012/tax year 2011 Potential tax “pitfalls” to watch out for Plan for having a successful filing season What is new for 2012 / tax year 2011 Deduction vs. Capitalization of tangible property costs regulations District of Columbia nonprofit corporation act District of Columbia budget support legislation for 2012 W-2 reporting changes Form 8955-SSA Capitalization regulations Background. Costs are currently deductible as a repair expense under Code Sec. 162 if they are incidental in nature, and neither materially add to the value of the property nor appreciably prolong its useful life. Costs also are currently deductible if they are for materials and supplies consumed during the year. Expenses must be capitalized under Code Sec. 263 if they are for permanent improvements or betterments that increase the value of the property, restore its value or use, substantially prolong its useful life, or adapt it to a new or different use. Uniform capitalization regulations IRS has issued temporary regulations, effective in tax years beginning after 2011, on the application of Code Sec. 162(a) and Code Sec. 263(a) to amounts paid to acquire, produce, or improve tangible property. The regulations clarify and expand the standards in the current regs; provide certain new bright-line tests for applying these standards; provide guidance under Code Sec. 168 and include rules for determining whether costs related to tangible property are deductible repairs or capital improvements. Capitalization regulations In 2008, IRS issued proposed regulations on when amounts are treated as paid to acquire, produce, or improve tangible property. The new temporary regulations adopt and refine many of the rules already contained in the 2008 proposed regulations, including: a new definition of “materials and supplies” a book conformity de minimis rule for acquisitions of units of property a safe harbor for routine maintenance Capitalization regulations The bottom line -- who does this affect? Exempt organizations with UBI activities against which they claim depreciation expense deductions Taxable subsidiaries that acquire depreciable fixed assets DC Nonprofit Corporation Act The new DC Nonprofit Corporation Act became effective July 2, 2011, and will be applicable to all post-1962 Act nonprofit corporations as of January 1, 2012. Some uncertainty remains as to whether "old act" corporations can effectively opt out of the new law, because the law states that "If the corporation desires to do business in the District, the corporation must file articles of incorporation with the Mayor and otherwise comply with this title." DC Nonprofit Corporation Act The act is more of a legal matter than tax law, but the highlights include: Increased membership involvement in board decisions Requirement to provide certain defined classes of membership proper notice of a meeting of membership Requirement to maintain certain organizational records and documents at the primary place of business DC budget law changes On July 28, 2011, the District of Columbia passed legislation to provide additional revenue for funding the 2012 budget (L. 2011, Act 19-98). The provisions outlined below were subject to the approval of Congress, and became effective as of October 1, 2011. DC budget law changes The legislation provides additional funding for the District of Columbia's 2012 budget through additional tax revenue, including the following: The requirement for combined reporting Imposes tax on most municipal bond interest Increases the minimum franchise tax The adoption of an apportionment formula with a double- weighted sales factor Modifies the safe harbor from estimated franchise tax underpayment penalties Extends (and increases) sales tax on selected services Imposes a sales tax on internet sales DC budget law changes Items of particular interest to exempt organizations: Minimum Corporate and Unincorporated Business Franchise Taxes The minimum corporate and unincorporated business franchise tax is increased under the Act from the current $100 to $250. In addition, if D.C. gross receipts are greater than $1 million (in UBI), the minimum tax payable is increased to $1,000. The change to the minimum tax applies for tax years beginning after December 31, 2010. DC budget law changes Estimated tax safe harbor: The Act increases the prior year tax safe harbor from estimated tax penalty for underpayment of estimated tax from 100% to 110% of the tax shown on a corporate or unincorporated franchise tax return. The change to the minimum tax applies for tax years beginning after December 31, 2011. DC budget law changes Apportionment of Business Income: Double-Weighted Sales Factor The Act changes the current corporation franchise tax apportionment formula of equally-weighted property, payroll, and sales factors to a formula utilizing a double-weighted sales factor. The change to the minimum tax applies for tax years beginning after December 31, 2010. W-2 reporting changes For tax years beginning on or after Jan. 1, 2011, Code Sec. 6051(a)(14), which was added by PPACA §9002, generally provides that the aggregate cost of the applicable employer-sponsored health insurance coverage must be reported on Form W-2, Wage and Tax Statement. IRS has issued revised guidance on health insurance coverage information reporting for employers (Notice 2012-9, 2012-4 IRB) W-2 reporting changes In Notice 2010-69, the IRS made this new reporting requirement optional for all employers for the 2011 Forms W-2 (given to employees in January 2012). In Notice 2011-28, the IRS provided further relief for small employers (i.e., those filing fewer than 250 Forms W-2) by making Code Sec. 6051(a)(14) reporting optional for health coverage provided through at least 2012, or until further guidance is issued by IRS. W-2 reporting changes Notice 2012-9 modifies, adds to, and replaces the guidance in Notice 2011-28 with additional guidance, in question and answer format, for employers who are subject to the information reporting requirement for the 2012 Forms W-2, and employers that choose to voluntarily comply with it for either 2011 or 2012. Employers subject to the informational reporting requirement for 2012 include all employers that provide applicable employer- sponsored coverage under IRC § 6051(a)(14) and issue 250 or more W-2 forms for 2011. IRS emphasizes that this reporting is for an employee’s information only in order to inform them of the cost of their health care coverage, and doesn't cause excludable employer-provided health care coverage to become taxable. Form 8955-SSA ERISA plans (which includes 401(k) 403(b) plans) must report separated plan participants who have deferred vested benefits for plan years beginning on or after January 1, 2009 Replaces Form 5500 Schedule SSA Due date for filing 2009 and 2010 plan years is January 17, 2010 Form must be filed by the last day of the seventh month following the last day of that plan year plus extensions (same deadline as Form 5500) Based on information provided by plan administrators Potential tax “pitfalls” to watch for in 2012 Sales and use tax registration State unemployment insurance tax Unclaimed property returns Personal property tax returns State charitable registrations DC Occupancy and real estate tax Common theme – mostly state tax issues State taxation and Nexus States are becoming increasingly aggressive in asserting their right to tax out-of-state businesses. How might they accomplish this? Through Nexus! State taxation and Nexus What is Nexus? The amount of physical presence or degree to which a business activity must be present before an entity's activities can be subject to state tax. Nexus is the determining factor of whether an out-of- state business selling products into a state is liable for collecting the tax on sales in the state. In general, a state will have the power to impose a tax or tax collection duty on a taxpayer if the taxpayer has sufficient nexus with the state. State taxation and Nexus What causes Nexus? Nexus is created when there is a temporary or permanent physical presence of people (employees, service providers, or independent sales/service agents), Property (inventory, offices, warehouses) Or economic activity (internet and telemarketing sales and solicitations) State taxation and Nexus People, property and economic activity include: Annual meetings, conventions and trade shows Catalog and internet sales Inventory/warehouse storage Telecommuting employees Branch office locations Charitable solicitations State taxation and Nexus What to do? Obtain a certificate of authority for doing business in a particular state Register for sales, use, property, income w/h tax, unemployment insurance, and in some states a gross receipts tax Registration is often made with a “combined registration” Form (in DC it is a FR-500) Sales and Use Tax When : Most states require the collection of sales tax for sales that occur within that state (physical presence) such as at trade shows. Many states require the collection of sales tax for transactions that do not entirely occur within the state (internet and telephone sales). Use tax often imposed by states to “make up the difference” for equipment used within a state that was brought in from another state (such as by a telecommuting employee) Other state tax issues: State unemployment insurance tax registration Telecommuting employees Opening of branch offices Unclaimed property returns Most commonly uncashed checks (vendor and payroll) Each state has different filing, dormancy periods, and remittance rules Personal property tax returns Generally Section 501(c)(3) organizations exempt Filings may be required even if no property is owned (MD) State Charitable registrations Telemarketing, direct mail (active – you will know where to register) Website solicitations (passive – you may not know where to register) Plan for having a successful filing season Audit and tax = one comprehensive engagement! With the Form 990, what is the ultimate goal? For exempt organizations to provide the IRS with financial, governance, and program information so that the IRS may ensure that an organization is operating within the parameters of its exempt purpose For a Section 501 (c)(3) organization, it may be used as a fundraising tool to provide the general public with the most favorable representation of the organization For a Section 501 (c)(6) organization, it may be used as a tool to provide the membership information on its activities in an effort achieve better accountability Plan for having a successful filing season How to accomplish this goal? Provide your tax preparers with executive compensation information (ODKE) in January Perform a flux analysis on the prior year’s Form 990 Parts III, IV, V, and VI with the current year (2011) activity to identify areas that may require increased disclosure Communicate draft and delivery needs with the tax manager during the audit fieldwork Speaker Biography Frederick Longwood, CPA, MST, is a manager in the Firm's Exempt Organization Tax Department with over 15 years of experience working with a broad range of tax-exempt organizations including research and educational organizations, public charities, civic leagues, membership organizations, and private foundations. Mr. Longwood has advised exempt organizations on a variety of issues including Taxation of employee benefit plans, intermediate sanctions, unrelated business income tax, and taxable subsidiaries. In addition to his exempt organization advisory and compliance experience, Mr. Longwood participated in the "Preparing for the new Form 990," Tate & Tryon client seminar series held October 2008 and March 2009 highlighting the changes to the Form 990 and was also a coauthor of the "Guide to the Newest IRS Form 990: Interpreting and Complying with the New Tax Reporting Requirements for Transparency and Accountability," (published by ASAE). Fred is a member of the American Institute of CPAs (AICPA) and the Greater Washington Society of CPAs (GWSCPA).
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