We re Tax Exempt Right? Federal, State and Local Tax Issues for Nonprofit Organizations

Transcription

1 We re Tax Exempt Right? Federal, State and Local Tax Issues for Nonprofit Organizations Presented by: Frank Sommerville, JD, CPA Weycer, Kaplan, Pulaski & Zuber, P.C. & Elaine Sommerville, CPA Sommerville & Associates, P.C Matlock Road, Ste. 201 Arlington, TX (817)

2 We re Tax Exempt Right? Federal, State and Local Tax Issues for Nonprofit Organizations I. Texas Sales Tax a. Texas Sales Tax Issues Obligation to Collect on Items Sold i. General Rule: If it is a tangible thing then you are required to collect sales tax and remit it to the state. ii. Exceptions Provided By Law Two Tax Free Days 1. What is this? a. A day is a 24 hours period b. The 12 months is January through December c. Does not apply to any item valued at more than $5,000 unless that item is donated or manufactured by the organization d. Advance orders may be taken and have the delivery date count as the tax free day. Everything delivered that day would be exempt. 2. Who can utilize? a. Each bona fide chapter of the organization may have two days b. It generally can include any group within the organization that elects officers. 3. Fundraising catalogue type sales are not considered as sales by the organization and therefore, do not qualify for a tax free day. Sales tax must be collected in some manner and remitted by the actual seller. iii. Exceptions Provided by Law Food & Beverage Sales 1. Sales of food by a church 2. Sales of food and beverages made during the regular school day. 3. Concession stand and other sales outside the school day if they are: a. Made by a school group b. Are a part of the fundraising activities c. All net proceeds go to the organization for its exclusive use 4. Annual banquets or food sales a. The event is not professionally catered or held at a restaurant, hotel or similar place of business b. The event is annual c. Last no more than one week d. Be a fundraising project Frank & Elaine Sommerville 2013 Page 2

3 e. Not held in competition with another retailer 5. Food items that are not ready to eat, i.e., cookie dough, pizza kits, etc. 6. Bakery products that you don t sell with a plate and utensils the napkin rule iv. Exceptions Provided by Law Miscellaneous 1. Gift Certificates/Passbooks 2. Car Washes 3. Amusement services, i.e, a concert, carnival, etc. 4. Periodicals and writings, including audio & video, published and distributed by a not for profit organization as long as it is not a public or private educational organization v. Applying and Obtaining a Sales Tax Permit 1. Apply online at 2. Apply on paper with Form AP-201 with the form available at 3. Obtaining a sales tax permit and filing the reports allows the statute of limitations to begin to run. The statute never runs on a report that is never filed. b. Texas Sales Tax Issues Obligation to Pay on Purchases i. Organization must obtain a sales tax exemption from the state in order to be exempt from paying tax on its purchases. Without state approval, an entity may not claim exemption from paying sales tax. ii. Exemption is not granted retroactively, but rather is granted as of the day the exemption application is filed. See information on Franchise Tax below for exemption applications. iii. Generally the sales tax exemption applies to any item used within the organization s exempt activities. This does not include fundraising activities with the exception that for schools, it includes fundraising activities for schools. iv. Individual s purchasing goods for the organization may claim the exemption as long as the exemption certificate given to the vendor states the organization the purchase is for and as long as there is no intervening use of the item by the individual. v. Online verification of an organization s exempt status for sales tax can be obtained at II. Texas Franchise Tax a. A nonprofit organization is subject to franchise tax until an exemption is granted. b. Exemptions are obtained by filing the correct application for exemption and often will be granted retroactively back to the date the organization was formed. Frank & Elaine Sommerville 2013 Page 3

4 i. Charitable Organization Form AP-205 ii. Educational Organization Form AP-207 iii. Religious Organizations Form AP-209 iv. Homeowners Associations Form AP-206 v. All others based on Federal Exemption AP-204 c. Failure to file will cost an organization its corporate charter. III. IV. Texas Hotel Occupancy Tax a. Exemptions are granted to: i. Religious organizations that are churches and their governing bodies ii. Charitable organizations providing specific services to the poor and indigent iii. Educational organizations b. An employee of these organizations may claim the exemption c. The nonprofit organization must have its exemption recognized by the state Property Taxes a. Exemption for Religious Organizations i. The real property and tangible personal property is owned by the religious organization and is used primarily as a place of regular religious worship and is reasonably necessary for engaging in religious worship b. Exemption for Charitable Organizations i. Not all charitable organizations may qualify for exemption. Each must determine how it fits into the Texas Property Tax Code and determine if it qualifies for exemption. c. Exemption for Nonprofit Schools i. Organization must meet the definition of a school including be a nonprofit corporation d. Property Use Considerations i. Occasional use of exempt property by a for profit or otherwise nonexempt user will generally not result in loss of exemption. The words occasional and incidental are meant to provide significant restrictions on the use of the property by outsiders. ii. Verify the organizational status of all users. iii. Avoid any appearance of private benefit by charging fair market value to users that are not nonprofit organizations. iv. All funds received from occasional nonexempt use must be used for exempt purposes. Keep records to prove this point. Frank & Elaine Sommerville 2013 Page 4

5 v. Keep records of exempt use especially when activities may appear to be nonexempt. Rework activities to include activities that are directly related to the exempt purposes of the organization. vi. Be cautious in advertising the availability of the space to outside parties or in a commercial like manner. vii. Consider restricting the use of such areas such as gift shops, bookstores, coffee shop, etc to the patrons/members of the organization. V. Unrelated Business Income a. General Definitions i. A trade or business; ii. Regularly carried on; and iii. Not substantially related to the exempt purposes of the organization. b. Statutory Exceptions i. Passive forms of income such as interest and dividends ii. Rents from real property iii. Gains and losses from the sale of property iv. Qualified sponsorship income 1. Does not apply where the payments are in connection with qualified convention and trade show activities or the sale of advertising in periodicals. 2. A payment where the payer does not receive a substantial return benefit in exchange for the payment a. Defined as any benefit other than an acknowledgment. An acceptable acknowledgment may contain; i. The payer s name and trademarked logo; ii. A value neutral description of the payer s product or service line; and iii. A list of the payer s locations, telephone numbers and websites. v. A trade or business in which substantially all of the work carried on in the business is performed without compensation vi. A trade or business carried on primarily for the convenience of members, students, patients, or employees vii. A trade or business consisting of the sale of donated merchandise viii. Income from certain bingo games ix. Income associated with the distribution of low cost articles x. Rental or exchange of mailing lists with other nonprofits xi. Certain income derived from tradeshows c. Exceptions to the Exceptions i. Debt financed income Frank & Elaine Sommerville 2013 Page 5

6 1. Any property that is held to produce income and has acquisition indebtedness on it for any part of the previous 12 months. 2. Income is taxed in proportion of the average acquisition indebtedness to the property s basis. 3. The activity is not required to be regularly carried on in order to be taxable. 4. Exceptions a. Related Use Test b. The Neighborhood Land Rule i. Property is contiguous to existing facilities (except for churches) ii. Property will be converted to exempt use within 10 years (15 years for churches); and iii. Within 90 days before the end of the 5 th year, the organization files a plan of intended use with the national office of the IRS. c. The property is substantially used for exempt purposes and the unrelated use is less that 15%. ii. Controlled Entities Income that is generally excluded may be taxable in some instances where it is received from a controlled entity. There are some exceptions to this rule. iii. Rental with Services Real estate rentals that include the provision of services are taxable. d. Commerciality Doctrine A business that is substantially conducted in a commercial manner may be too commercial to be considered as related to the exempt purposes of the organization. e. Filing Requirements Form 990-T due 4 ½ months after the end of the fiscal year for years where the gross unrelated business income is $1,000 or more. The Form 990-T is open for public inspection. Frank & Elaine Sommerville 2013 Page 6