Steward Leaders: [Non-profit Myths 2] Taxes

Posted by Matthew Thomas

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Over the last two weeks, we have looked at non-profit basics and dug in to one of the six myths that are common confusions for non-profit leadership.

 

The first myth is about non-profits that make money.

 

Today, we look at the second myth: that non-profits don’t pay taxes.

 

Where does this myth come from?

 

The myth that non-profits don’t pay taxes is based on the well-founded fact that non-profits do not pay federal corporate income taxes in the United States. In other words, unlike regular businesses, non-profits do not pay the (as of 2015) 15% to 35% on the net of revenues over expenses. Businesses call this "profit" while non-profits call this "surplus". In other words, if a non-profit takes in $1 Million and spends $990,000.00, then their surplus is $10,000, which would be taxable to a business, but is not to a non-profit.

 

Like what you're reading? Subscribe Now! Non-profits are also exempted from FUTA (and the state equivalents): Federal Unemployment Taxes.

 

So no, non-profits don't pay those taxes.

 

However, those aren't the only taxes that affect non-profits. In many cases, these other taxes can be waived, but some get paid no matter what.

 

Income taxes on "unrelated business income": non-profits can still pay some form of income taxes if a non-profit engages in what the IRS deems to be "unrelated business." Once again, this isn't a tax on the total revenues, but only on the net revenues less expenses for the portion of the non-profit considered to be "unrelated business."

 

Property Taxes: Property taxes are levied by municipalities, and administered by the counties and the states to which the municipalities belong. School boards, cities, townships, park districts, etc., all typically have taxing authority based on the value of real estate owned by individuals and corporations, including non-profits. Different exemptions from property taxes apply for some organizations. For instance, most churches holding regular services of worship are exempted. However, other religious organizations often pay property taxes. Since taxes are assessed by real estate parcel, sometimes one parcel of land is tax-exempt, while another parcel is not, depending on usage.

 

Payroll Taxes: FICA and Medicare. For non-profits with employees that are not exempt from FICA and Medicare (and pay Self-Employment Tax instead), employers pay half of the FICA and Medicare taxes due based on the employee's compensation. Employers are also responsible to deposit taxes withheld from their employees' compensation - and subject to penalties and interest if they do not. So while the employer is only responsible to pay 6.2% of employees' compensation for FICA (up to a dollar limit) and 1.45% for Medicare, employers, even non-profit employers, are responsible to deduct payroll taxes from employees' paychecks, file an employer payroll tax return (typically quarterly, or at least annually) and deposit all their employees' deducted taxes.

 

Sales Taxes: Since sales taxes are administrated locally, most non-profits can receive exemptions from sales taxes, but must fill out a form at each vendor to receive tax-exempt status. Sales taxes are typically collected by the vendor on behalf of the purchaser, so each vendor must keep a file of those non-profits who have exempt status.

 

Excise Taxes: Taxes on gasoline, beverage alcohol, tobacco, etc., are levied per unit (e.g., 25 cents for each gallon of gasoline), and embedded in the retail price. Therefore, non-profits pay excise taxes regularly in the course of business. Unless these things are purchased at "duty free shops", no one is exempt from them. And crossing an international border to be free from them is probably not worth the hassle for most of us.

 

So do non-profits pay taxes? Most do - in some form. Non-profits certainly pay less in taxes than other businesses. No non-profit pays income taxes on its charitable work. So while grounded in truth, it is a myth to say that a non-profit never pays taxes ever at any time. For some non-profit leaders, this comes as a surprise, and often at a time when it has grown to a place where penalties and interest are already involved.

 


 

Financial Roles Get the map! Design Group International provides a tool to help determine what financial roles your organization has covered, and where it may have some gaps. Click the button to the left to get your free roles tool today!

 


 

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Topics: nonprofit sector, Tax Filing, steward leaders, Matthew Thomas, steward leader, tax, Tax-Exempt, payroll taxes, non-profits, non-profit

The Fiscal Cliff: What is it? Will it affect my Organization?

Posted by Matthew Thomas

We have heard much in the news lately about the United States Federal Government’s “Fiscal Cliff”. I get a lot of questions about what it is, and what its impact will be if it happens.

Sisyphus, Fiscal CliffIn essence, the “Fiscal Cliff” is a set of automatic spending cuts and tax increases that will take place on 1 January 2013 if both houses of Congress and the White House cannot agree on a Federal budget (or a stop-gap temporary alternative deal).  This means that nearly everyone in this country earning income will pay, at minimum, an additional 2% in payroll (FICA) taxes, and, for those earning enough to pay Federal income tax, somewhere around an additional 3% in income taxes, while at the same time, significant cuts to defense / military spending and entitlement spending go into effect, significantly curtailing government services.

At issue is the growing national debt, the growth of which is accelerated by fiscal deficits, which is of serious concern to many people. Nobody likes paying taxes, and so, with a few exceptions like Warren Buffett, most people prefer to see someone else pay more in taxes if anyone has to pay more at all.

Some argue that spending is the main problem, since they don’t like the programs that are costing money in the first place. So they suggest strenuously that raising taxes (or other alternative revenue-raising approaches) are off the table to try to fiscally force the termination of programs they find superfluous, worthless, questionable, or dangerous.

Others argue that it takes a certain amount of money, after all, for a government to do what it has to do, and that if you keep the programs that most people (most being defined by anything between 51% and 99% of the nation) want, there still isn’t enough money to go around. Not to mention the fact that costs for Social Security and Medicare are increasing faster than money is coming in through payroll taxes and other revenue streams. Therefore, they argue, that taxes for at least some people should go up to cover those costs.

Moreover, a lot of the same people argue that since the United States Government has a lot of cash (and even more credit), that the government, through spending additional money on projects that benefit the general population (at least most of them), can use its cash and credit to put people to work and inject money into the economy, known as stimulus. This will increase the whole economy’s capacity to employ people if the stimulus can be large enough and last long enough to give people the economic wherewithal to eventually be able to work without needing the government stimulus.

The problem is that this sounds, to many people, as if the government will continue to live beyond its means and never deal with its debts and deficits. More and more stimulus will be necessary to support a weak economy, which will cause taxes to go up, and so on, while most people don’t see a good return in services on their tax payments. They don’t believe the issue of indebtedness will never be resolved.

Everyone is stuck in a standoff.

So if the “Fiscal Cliff” happens, it is likely that enough money will quit flowing through the economy enough that the total amount of goods and services produced by the country (Gross Domestic Product, or GDP) in 2013 will be less than it is now, which, if it lasts more than six months, and involves several other correlated factors, is called a recession. Despite the spending cuts and tax increases that triggered it, this new theoretical recession would likely exacerbate government deficits (because most government revenues are linked to income, sales, and excise taxes), and require more borrowing to maintain even the increasingly limited government goods and services. This will have significant impact on businesses and organizations of all sizes.

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Topics: Matthew Thomas, Design Group International, Fiscal Cliff, Tax cuts, government spending, tax increases, tax hikes, government stimulus, payroll taxes, trust