Insurance is the cornerstone of any not-for-profit’s comprehensive risk management plan. It can’t protect your organization from every contingency, but it’s critical to protecting the people, property, funds, and support you depend on.
Many kinds of insurance coverage are available, but it’s unlikely your organization needs all of them. One type you do need is a general liability policy for accidents and injuries suffered on your property by clients, volunteers, suppliers, visitors and anyone other than employees. Your state also likely mandates unemployment insurance as well as workers’ compensation coverage.
Property insurance that covers theft and damage to your buildings, furniture, fixtures, supplies, and other physical assets is essential, too. When buying a property insurance policy, make sure it covers the replacement cost of assets, rather than their current market value (which is likely to be much lower).
Depending on your nonprofit’s operations and assets, consider such optional policies as:
• Product liability,
• Fraud/employee dishonesty,
• Business interruption,
• Umbrella coverage, and
• Directors and officers liability.
Insurance also is available to cover risks associated with special events. Before purchasing a separate policy, however, check whether your general liability insurance extends to special events.
Because you’re likely to be working with a limited budget, prioritize the risks that pose the greatest threats and discuss with your financial and insurance advisors the kinds and amounts of coverage that will mitigate them. But don’t assume insurance alone will address your nonprofit’s exposure.
Your objective should be to never actually need insurance benefits. To that end, put in place internal controls and other risk-avoidance policies. We can help you establish policies that stipulate proper oversight of accounting functions by executives and board members and provide for the security of physical assets and safety of employees and nonemployees. And your insurance agent can help determine the amount of coverage that’s appropriate given the size and scope of your organization. © 2018
Tax identity theft may seem like a problem only for individual taxpayers. But, according to the IRS, increasingly businesses are also becoming victims. And identity thieves have become more sophisticated, knowing filing practices, the tax code, and the best ways to get valuable data.
How it works
In tax identity theft, a taxpayer’s identifying information (such as Social Security number) is used to fraudulently obtain a refund or commit other crimes. Business tax identity theft occurs when a criminal uses the identifying information of a business to obtain tax benefits or to enable individual tax identity theft schemes.
For example, a thief could use an Employer Identification Number (EIN) to file a fraudulent business tax return and claim a refund. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for these “employees” to claim refunds. The consequences can include significant dollar amounts, lost time sorting out the mess, and damage to your reputation.
There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if:
Keep in mind, though, that some of these could be the result of a simple error, such as an inadvertent transposition of numbers. Nevertheless, you should contact the IRS immediately if you receive any notices or letters from the agency that you believe might indicate that someone has fraudulently used your EIN.
Businesses should take steps such as the following to protect their own information as well as that of their employees:
Of course, identity theft can go beyond tax identity theft, so be sure to have a comprehensive plan in place to protect the data of your business, your employees, and your customers. If you’re concerned your business has become a victim, or you have questions about prevention, please contact us. © 2018
Many not-for-profits supplement their usual income-producing activities with sponsorships or advertising programs. Although you’re allowed to receive such payments, they’re subject to unrelated business income tax (UBIT) unless the activities are substantially related to your organization’s tax-exempt purpose or qualify for another exemption. So it’s important to understand the possible tax implications of income from sponsorships and advertising.
What is sponsorship?
Qualified sponsorship payments are made by a person (a sponsor) engaged in a trade or business with no arrangement to receive, or expectation of receiving, any substantial benefit from the nonprofit in return for the payment. Sponsorship dollars aren’t taxed. The IRS allows exempt organizations to use information that’s an established part of a sponsor’s identity, such as logos, slogans, locations, telephone numbers, and URLs.
There are some exceptions, however. For example, if the payment amount is contingent upon the level of attendance at an event, broadcast ratings or other factors indicating the quantity of public exposure received, the IRS doesn’t consider it a sponsorship. Providing facilities, services or other privileges to a sponsor — such as complimentary tickets or admission to golf tournaments — doesn’t automatically disallow a payment from being a qualified sponsorship payment.
Generally, if the privileges provided aren’t what the IRS considers a “substantial benefit” or if providing them is a related business activity, the payments won’t be subject to UBIT. But when services or privileges provided by an exempt organization to a sponsor are deemed to be substantial, part or all of the sponsorship payment may be taxable.
What is advertising?
Payment for advertising a sponsor’s products or services is considered unrelated business income, so it’s subject to tax. According to the IRS, advertising includes:
• Messages containing qualitative or comparative language, price information or other indications of value,
• Endorsements, and
• Inducements to buy, sell, or use products or services.
Activities often are misclassified as advertising. Using logos or slogans that are an established part of a sponsor’s identity is not, by itself, advertising. And if your nonprofit distributes or displays a sponsor’s product at an event, whether for free or remuneration, it’s considered use or acknowledgment, not advertising.
The rules pertaining to qualified sponsorships, advertising and unrelated business income are complex and contain numerous exceptions and situation-specific determinations. Contact us with questions. © 2018
Does your business reimburse employees’ work-related travel expenses? If you do, you know that it can help you attract and retain employees. If you don’t, you might want to start, because changes under the Tax Cuts and Jobs Act (TCJA) make such reimbursements even more attractive to employees. Travel reimbursements also come with tax benefits, but only if you follow a method that passes muster with the IRS.
The TCJA’s impact
Before the TCJA, unreimbursed work-related travel expenses generally were deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to benefit from the deduction because either they didn’t itemize deductions or they didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.
For 2018 through 2025, the TCJA suspends miscellaneous itemized deductions subject to the 2% of AGI floor. That means even employees who itemize deductions and have enough expenses that they would exceed the floor won’t be able to enjoy a tax deduction for business travel. Therefore, business travel expense reimbursements are now more important to employees.
The potential tax benefits
Your business can deduct qualifying reimbursements, and they’re excluded from the employee’s taxable income. The deduction is subject to a 50% limit for meals. But, under the TCJA, entertainment expenses are no longer deductible. To be deductible and excludable, travel expenses must be legitimate business expenses and the reimbursements must comply with IRS rules. You can use either an accountable plan or the per diem method to ensure compliance.
Reimbursing actual expenses
An accountable plan is a formal arrangement to advance, reimburse, or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:
The IRS will treat plans that fail to meet these conditions as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).
Keeping it simple
With the per diem method, instead of tracking actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses, based on location. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.) Be sure you don’t pay employees more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely overpay per diems.
What’s right for your business?
To learn more about business travel expense deductions and reimbursements post-TCJA, contact us. We can help you determine whether you should reimburse such expenses and which reimbursement option is better for you. ©2018
How much are your volunteers worth? The not-for-profit advocacy group Independent Sector estimates the value of the average American volunteer at $24.69 an hour. Volunteers who perform specialized services may be even more valuable.
Whether your entire workforce is unpaid or you rely on a few volunteers to support a paid staff, you need to safeguard them. Here’s how:
1. Create a professional program
“Professionalizing” your volunteer program can give participants a sense of ownership and “job” satisfaction. New recruits should receive a formal orientation and participate in training sessions. Even if they’ll be contributing only a couple of hours a week or month, ask them to commit to at least a loose schedule.
As with paid staffers, volunteers should set annual performance goals. For example, a volunteer might decide to work a total of 100 hours annually or learn enough about your mission to be able to speak publicly on the subject. If volunteers accomplish their goals, publicize the fact. And consider “promoting” those who’ve proved they’re capable of assuming greater responsibility. For example, award the job of volunteer coordinator to someone who has exhibited strong communication and organization skills.
2. Keep them engaged
A formal program won’t keep volunteers engaged if it doesn’t take advantage of their talents. What’s more, most volunteers want to know that the work they do matters. So even if they must occasionally perform menial tasks such as cleaning out animal shelter cages, you can help them understand how every activity contributes to your charity’s success.
During the training process, inventory each volunteer’s experience, education, skills, and interests and ask if there’s a particular project that attracts them. Don’t just assume that they want to use the skills they already have; many people volunteer to learn something new.
3. Make it fun
Most volunteers understand that you’ll put them to work. At the same time, they expect to enjoy coming in. So be careful not to make the same demands on volunteers that you would on employees.
Also, try to be flexible when it comes to such issues as scheduling. Because many volunteers are motivated by the opportunity to meet like-minded people and facilitate friendships. Newbies should be introduced to other volunteers and assigned to work alongside someone who knows the ropes. Also schedule on- and off-site social activities for volunteers.
4. Remember to say “thank you”
No volunteer program can be successful without frequent and effusive “thank-yous.” Verbal appreciation will do, but consider holding a volunteer thank-you event. © 2018
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
- For calendar-year C corporations that filed an extension: File a 2017 income tax return (Form 1120) and pay any tax, interest and penalties due.
- Make contributions for 2017 to certain employer-sponsored retirement plans.
- Report income tax withholding and FICA taxes for third quarter 2018 (Form 941) and pay any tax due. (See exception below under “November 13.”)
- Report income tax withholding and FICA taxes for third quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.
- For calendar-year C corporations, pay the fourth installment of 2018 estimated income taxes.
Contrary to popular belief, it’s usually perfectly legal to compensate not-for-profit board members — and sometimes it might even be necessary. But is it right for your organization?
Pros and cons
Board member compensation comes with several pros and cons to consider. Your organization might, for example, find it worthwhile to offer compensation to attract individuals who:
• Are prominent or bring highly specialized expertise.
• Could receive generous compensation from for-profit organizations for serving on their boards.
• Are expected to invest significant time and effort.
• Represent diverse cultures, classes and ages.
Also, if your nonprofit has a business model that competes with for-profit organizations, such as a nonprofit hospital, board compensation may be appropriate. In general, providing compensation can improve board member performance and promote professionalism. It may also incentivize meeting attendance and accountability.
But there are several drawbacks. First, it can look bad. Donors expect their funds to go to program services, and board compensation represents resources diverted from your organization’s mission. Further, there are legal and IRS implications. In some states, for example, volunteer board members are protected from legal liability, while compensated members may not be.
If you decide to compensate board members, make sure your arrangement complies with the Internal Revenue Code’s private inurement and excess benefit regulations, as well as the IRS rules about “reasonable compensation.” Failure to do so can result in excise taxes, penalties, and even the loss of your tax-exempt status.
Independent directors, an independent governance or compensation committee, or an independent consultant should set the amount of, or formula for, board compensation. Whoever sets the amount should be guided by a formal compensation policy and make the amount comparable to that paid by similar nonprofits. Your policy should outline:
• How compensating board members benefits your organization (for example, by allowing it to attract a member with financial expertise),
• Which members are eligible for compensation (the chair, the officers or all members),
• How compensation is structured (for instance, flat or per-meeting fee), and
• Expectations for board members in exchange for compensation, such as meeting attendance, qualifications and experience.
Also document all compensation discussions, including your board’s formal vote approving the policy and the compensation amounts.
The bottom line
Ultimately, the decision whether to pay your board members will come down to your nonprofit’s culture, the expectations of donors and members, and similar factors. If you decide to move forward, discuss the matter with your attorney. We can also help answer your compensation questions. © 2018
Classifying a worker as an independent contractor frees a business from payroll tax liability and allows it to forgo providing overtime pay, unemployment compensation, and other employee benefits. It also frees the business from responsibility for withholding income taxes and the worker’s share of payroll taxes. For these reasons, the federal government views misclassifying a bona fide employee as an independent contractor unfavorably. If the IRS reclassifies a worker as an employee, your business could be hit with back taxes, interest and penalties.
When assessing worker classification, the IRS typically looks at three main factors: the level of behavioral control, the level of financial control, and the relationship of the parties.
1. Level of behavioral control: This means the extent to which the company instructs a worker on when and where to do the work, what tools or equipment to use, whom to hire, where to purchase supplies and so on. Also, control typically involves providing training and evaluating the worker’s performance. The more control the company exercises, the more likely the worker is an employee.
2. Level of financial control: Independent contractors are more likely to invest in their own equipment or facilities, incur unreimbursed business expenses, and market their services to other customers. Employees are more likely to be paid by the hour or week or some other time period; independent contractors are more likely to receive a flat fee.
3. Relationship of the parties: Independent contractors are often engaged for a discrete project, while employees are typically hired permanently (or at least for an indefinite period). Also, workers who serve a key business function are more likely to be classified as employees.
The IRS examines a variety of factors within each category. You need to consider all of the facts and circumstances surrounding each worker relationship.
Once you’ve completed your review, there are several strategies you can use to minimize your exposure. When in doubt, reclassify questionable independent contractors as employees. This may increase your tax and benefit costs, but it will eliminate reclassification risk. From there, modify your relationships with independent contractors to better ensure compliance. For example, you might exercise less behavioral control by reducing your level of supervision or allowing workers to set their own hours or work from home. Also, consider using an employee-leasing company. Workers leased from these firms are employees of the leasing company, which is responsible for taxes, benefits and other employer obligations.
Handle with care
Keep in mind that taxes, interest, and penalties aren’t the only possible negative consequences of a worker being reclassified as an employee. In addition, your business could be liable for employee benefits that should have been provided but weren’t. Fortunately, careful handling of contractors can help ensure that independent contractor status will pass IRS scrutiny. Contact us if you have questions about worker classification. © 2018a