Non Profit Q&A     Small Business     Tax Services


Q: How does a qualified organization go about applying for and obtaining the federal tax exemption ?

A: Organizations requesting tax exemption under Section 501 [c] [3] of the Internal Revenue Code, must file a 22-page Form 1023 with the Internal Revenue Service. For organizations requesting tax exemption under other sections (4 to 29) of the Internal Revenue Code, Federal Form 1024 must be filed.

Q: What are the periodic reporting requirements of non profit organizations ?

A: The annual filing requirements are, among other things:
·Form 990 Must be filed by the 15th day of the 5th month after the close of the taxable year for all exempt organizations except private foundations, farmers cooperatives, homeowners assoc. and political organizations.
·Form 990 -Schedule A Must be filed with Form 990 for all Section 501[c] [3] organizations except private foundations
·Form 4720 must be filed by the 15th of the 5th month after the close of the taxable year for private foundations, foundation managers, and disqualified persons subject to excise and penalty taxes.
·Form 1120POL Must be be filed by the 15th day of the 3rd month after the close of the taxable year for political organizations.
·Form 1120H Must be filed by the 15th day of the 3rd month after the close of taxable year for home owners associations.

Q: What are the reporting requirements of nonprofit organizations with respect to individual contributions ?

A: Upon the request of the donor, the nonprofit organization must submit a written acknowledgement to the donor confirming the contribution for contributions of $250 or more. At a minimum, the acknowledgement must contain the following:
·Amount of the contribution, if cash
·Description of any no-cash items contributed (do not include the value of such items)
·Description and value of any goods or services provided by the organization in exchange for the contribution; and
·If goods or services provided by the organization in exchange for the contribution are of an "intangible religious benefit" , then a statement must be included.

Q: Can a Section 501 [c] [3] organization participate in government or political campaigns ?

A: No. Section 501 [c] [3] organizations are prohibited from any political activity no matter how substantial or insubstantial.

Q: Can Nonprofit organizations participate in lobbying?

A: Any not-for-profit organization may participate in some lobbying except for private foundations and title holding companies. In general, lobbying must be an insubstantial part of the operations of most non profit organizations.

Q: What is unrelated business income ?

A: In general unrelated business income is taxable income to a non profit organization from a trade or business activity that is regularly carried on, and an activity that is not substantially related to the exempt purpose if the organization.

Q: Is income from fund raising events considered unrelated business income ?

A: In general, no, since fund raising events held by not-for-profit organizations are not regularly carried on.

Q: Are gains and losses on the sale or exchange of property unrelated business income?

A: No, gains and losses from the sale or exchange of property are specifically excluded from unrelated business income, except for gains and losses on debt-financed property, property held primarily for sale to customers, and dispositions of inventory. In addition, Section 501 [c] [7], [9] [17] and [20] organizations are not covered by this exclusion.

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Q: Are alimony payments considered taxable income ?

A: No alimony, separate maintenance and similar payments from your spouse of former spouse are taxable to you in the year received.

Q: I moved to a different state to accept a new job. Will I be able to deduct all my moving expenses ?

A: If you moved because of a change in your job location or because you started a new job, you may be able to deduct your moving expenses. To qualify for the moving expense deduction, you must meet two tests: The first test is distance. The second test concerns time. You can only deduct certain moving expenses that were not reimbursed by your company

Q: What kinds of property can be depreciated for tax purposes ?

A: Only property used in trade or business or to produce income can be depreciated. The kinds of property that can be depreciated include machinery, equipment, buildings, vehicles, furniture and computers.

Q: Do I have to withhold payroll taxes on my household employee? If so how much and when do I pay it? What are the reporting requirements?

A: For federal purposes, if you pay wages of $1300 or more in 2001 to any one household employee, you will need to withhold and pay social security and Medicare taxes. For California state purposes, if you pay wages to all household employees totaling less than $750 in every calendar quarter, you do not need to withhold pay or report any wages paid. If you pay wages totaling between $750 and $1,000 for any calendar quarter, you are only responsible for withholding state disability insurance (SDI) from your employee's wages (although you may choose to pay this yourself). If you pay wages greater than $1,000 in any calendar quarter, you will be responsible for withholding SDI and paying unemployment taxes and employee training taxes.

Q: Is the money received from my court settlement taxable?

A: For court awards and damages, to determine if settlement amounts you receive by compromise or judgement must be included in your income, you must consider the item which the settlement replaces. Include the following as ordinary income:
·Interest on any award
·Compensation for lost wages or lost profits in most cases
·Punitive damages (see below)
·Amounts received in settlement of pension rights (if you do not contribute to the plan)
·Damages for:
1.Patent or copyright infringement
2.Breach of contract
3.Interference with business operations
·Any recovery under the age discrimination in Employment Act
·Damages to your character
·Alienation of affection
Note: Do not include in your income compensatory damages for personal physical injury or sickness - whether received in limp sum or installments.

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Q. How long do I need to keep certain records

A. Records such as receipts, cancelled checks and other documents to prove an item of income or a deduction appearing on your return should be kept until the statute of limitations expires for the return. Usually this is three years from the date the federal tax return was due or filed (the California rule is four years), or two years from the date the tax was paid, whichever is later. There is no period of limitations when a return is false or fraudulent or when no return is filed. You should keep some records indefinitely, such as property records, since you may need them to prove the amount of gain or loss if the property is sold. If you are an employer, you must keep all your employment tax records for at least four years after the tax is due or paid, which ever is later.

Q. Why do banks require customers to complete Form W-9 when they open a new account ?

A. Your investment income is generally not subject to regular withholding, however, it may be subject to backup withholding to ensure that income tax is collected on this income. Under backup withholding, when you open up a new account, you must certify under penalties of perjury that your social security number is correct and that you are not subject to backup withholding. Form W-9, Request For Taxpayer Identification Number and Certification, is used to make this certification. If you fail to make this certification on Form W-9, or similar statement, backup withholding may begin immediately on your new account and 31% of the interest paid on your account will be withheld.

Q. I have already filed my return and now I have received another Form W-2, What can I do ?

A. If you find that you did not report some income, you left out deduction or credits you should have claimed, you failed to claim some deductions or credits you are entitled to, or you should have used a different filing status, or in short made a mistake on the return, you should file an amended return.

Q. For IRS purposes, how do I classify a limited liability company (LLC)? Is is a partnership or a corporation?

A. A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes either as a partnership or a corporation, depending on the specifics of your state's organizational requirements. A single member LLC may elect to be classified as a sole proprietorship or a corporation

Q. My father is in a nursing home and I pay for the entire cost. Can I deduct this on my tax return?

A: You may deduct qualified medical expenses you pay for yourself, your spouse and your dependents, including a person you claim as a dependent under a Multiple Support Agreement. You can also deduct medical expenses you paid for someone who would have qualified as your dependent except that the person did not meet the gross income or joint return test. Nursing home expenses are allowable as medical expenses in certain instances. If you, your spouse, or your dependent is in a nursing home or home for the aged, and the primary reason for being there is for medical care, the entire cost, including meals and lodging, is a medical expense. If the individual is in the home mainly for personal reasons, then only the cost of actual medical care is a medical expense, and the cost of the meals and lodging is not deductible.

Q. I paid my father's real estate taxes last year. Can I deduct this on my tax return?

A. Generally, you can deduct only taxes that are imposed on you, so the answer is, no.

Q. I refinanced my home last year and paid points; question: are they all deductible this year?

A. No. Points paid solely to refinance your home mortgage cannot be deducted in the year paid . Instead they must be deducted over the life of the loan.

Q. I donated a used car to a qualified charity. Do I need to attach any special forms to my return to take a deduction for a charitable contribution?

A. You must fill out Section A of Form 8283, Noncash Charitable Contributions, if your total deduction for all noncash contributions is more than $500. If you make a contribution of noncash property worth more than $5,000, generally an appraisal must be done. In that case, you also fill out Section B of Form 8283. Attach Form 8283 to your return. For a contribution of $250 or more, you can claim a deduction of only if you obtain written acknowledgement from the qualified organization.

Q. I went through a divorce last year and paid a lot of legal fees. Are these deductible on my tax return?

A. Legal fess for the divorse itself and property settlement are not deductible; however, legal fees to collect taxable income, such as alimony, are deductible as miscellaneous itemized deductions on Form 1040, Schedule A. Most miscellaneous itemized deductions are subject to the 2% limit. This means you can deduct the amount left after you subtract 2% of your adjusted gross income from their total.

Q. I use part of my living room as an office, can I take a seduction for business use of my home?

A. In general if you use part of your home for both personal and business purposes, no expenses for business use of that part are deductible. Exceptions apply for qualified day-care providers and for the storage of inventory of product samples used in the business.

Q. Are business gifts deductible ?

A. If you give a business gift in the course of your trade or business, you can deduct the cost subject to special limits and rules. In general, you can deduct no more than $25 for business gifts you give directly or indirectly to any one person during your tax year. Exceptions may apply.

Q. I took an accounting class in order to keep my salary on my current job. My employer did not reimburse me for the expenses. Can I take a deduction on my return for the cost of the course?

A. You may be able to deduct work-related educational expenses as a miscellaneous deduction subject to the 2% adjusted gross income limitation on Form 1040, Schedule A. To be deductible, your expenses must be for education that: 1. Maintains or improves skills required in your present job, or 2. Serves a business purpose and is required by your employer, or by law or regulations, to keep your salary status, or job. Your expenses are not deductible if the education is required to meet the minimum educational requirements of your job or is part of a program that will lead to qualify you in a new trade or business.

Q. I am a sole proprietor. Can I use Schedule C-EZ instead of Schedule C?

A. You can use Form 1040 Schedule C-EZ to determine your net profit if you have only one sole proprietorship and you meet all the following requirements: your business expenses were not more than $2,500, and you did not have an inventory during the year. There are five other requirements Refer to page 1 of Schedule C-EZ to see if you qualify. Additional information is also available in Tax topic 408, Sole Proprietorship.

Q. How much am I allowed to deduct as a capital loss this year?

A. Your allowable capital loss for any tax year, figured on Form 1040, Schedule D, is limited to the lesser of: 1. $3,000 ($1,500 if you are married and filed a separate return), or 2. Your capital loss as shown on line 18 of Schedule D. If you have a capital loss on line 18 of Schedule D that is more than the yearly limit on capital loss deductions, you can carry over the unused part to later years until it is completely used up.

Q. How long do I have to roll over a retirement distribution to an IRA account?

A. You must complete the rollover by the 60th day following the day on which you receive the distribution. (This 60-day period is extended for the period during which the distribution is in a frozen deposit in a financial situation.) A written explanation of rollover must be given to you by the issuer making the distribution.

Q. I rent my home out for two weeks ech year. Do I have to show the income on my return?

A. If you use a dwelling as a home and rent it for fewer than 15 days during the year, do not report any of the rental incole and do not deduct any expenses as rental expenses. In this case, you may deduct some expenses on Form 1040, Schedule A, such as mortgage interest, property taxes and any casualty losses.

Q. I have losses from a passive rental real estate activity in which I actively participate. Can I offset the losses against my nonpassive income?

A. If your rental of real estate is a passive activity, you may generally offset a lossof up to $25,000 against your nonpassive income if you actively participate in the activity. However, married persons filing separate returns who lived together at any time during the year may not claim this offset. Married persons filing separate returns who lived apart at all times during the year are each allowed a $12,500 maximum offset for passive real estate activities.

Q. Are gifts, bequests, or inheritances taxable?

A. Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rentals, that income is taxable to you. If you inherit an individual Retirement Account (IRA) or proceeds from retirement (pension) plan, special rules apply.

Q. What are the new tax rates as mandated by the 2001 Economic Growth and Tax Relief Reconciliation Act?

A. Effective July 1, 2001, the previous regular income tax rates of 28 percent, 31 percent, 36 percent, and 39.6 percent are phased down as follows (in percents):

Calendar Yr.28%31%36%39.6%
2006 & Later25283335

Note that the 15-percent tax rate continues under the new law, however its bracket will begin at the end of the new 10-percent bracket. Other changes to this bracket are made through the marriage penalty relief.

Q. For tax years beginning after 2000 what are the allowable child care credit?

Under the 2001 Economic Growth Reconciliation Act (EGRA) the child credit is increased to $1,000, but phased-in over 10 years as follows:

Calendar YearCredit Amount per Child
2010 & later$1,000

Q. Given that the EGRA provisions are effective July 1, 2001, will tax payers get a refund or credit on their withholdings?

A. Most taxpayers will receive a credit through a Treasury check, based on the return filed for 2000 (instead of 2001) as follows:

·Single - $300
·Head of Household - $500
·Married filing jointly - $600

Congress anticipates that the Treasury will issue all checks before October to taxpayers who filed their 2000 returns by April 16. Later filers or those with extensions will receive their checks later in the fall.

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