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

Steward Leaders: What Value Proposition Do You Present to Others?

Posted by Matthew Thomas

As we have discussed in a previous post (Non-Profit Leadership: Taxing Non-Profits), many charitable organizations have significant difficulty making the value proposition to their local communities to retain the previously unassailable rights and privileges to all forms of tax exemption. Communities requiring PILOTS (Payments in Lieu of Taxes) of certain non-profit entities believe that the non-profit is creating a greater burden in community services than it is offsetting through its charitable work – the expense of which would otherwise have to be then borne by the community or done without.

matthew-thomas-2The difficulty here is disconnected and incongruent assumptions between the non-profits and their communities as to what their value proposition is. Steward leaders wrestle with how to state their organization’s value proposition, whether they are leaders of a non-profit or a local community struggling with its finances.

As Design Group International CEO Mark Vincent outlines in his Stewardship Manifest (pp. 3 – 4), there are three main ways in which a stewardship value proposition develops, outside of faith-based entities:

  1. Obligation
  2. Philanthropy
  3. Prosperity – which I will take the liberty of re-naming “Investment.”

Obligation occurs when someone owes someone else something. This obligation allows certain benefits, and often avoids certain difficulties, penalties or otherwise undesirable consequences. In the context we are discussing here, the most obvious form of obligation takes the form of taxes imposed by a community on its citizens and businesses. Nevertheless, charitable organizations can also act as though their communities (and by extension, their donors and other stakeholders) owe the charity something for the work they are doing. Any time the conversation begins to revolve around how there would be negative consequences if certain donors, stakeholders or community governments don’t allow some benefit, obligation is at least implied, if not explicit. Obligation often is more out of the avoidance of negative consequences than the enjoyment of certain benefits.

Philanthropy occurs when people are invited to “make the world a better place.” The motivation behind this can be anything from altruism to legacy-building, and anything in between. This is often the motivation when people use the term “civic pride” or “making our community a better place to live”. Philanthropists often will attach restrictions to how their gifts are used, even within the context of a non-profit, for specific projects or purposes. Philanthropy is a value proposition based on legacy, reputation, and the public good.

Investment occurs when people contribute with the expectation of gaining something in return. Whether this is the right to advertize in the playbill for a local theater production, or to gain “intangible religious benefits,” as the IRS so elegantly phrases it, investment is a value proposition offered with the expectation that the donor will benefit personally from involvement.

Being clear on the value proposition steward leaders communicate to their communities, their donors, their clients and themselves will help whenever questions of value – such as in the taxation of non-profits – arise. Each value proposition has its place, and each has varying amounts of power to motivate in its context. Faith-based groups can add yet another value proposition, which we will discuss in a separate post.

What value proposition are you offering to others as a Steward Leader?

Get "A Stewardship Manifest"

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Topics: Value Proposition, Matthew Thomas, nonprofit organizational leadership, Tax-Exempt

Non-Profit Organizations: Tax Filing Due 31 July 2013

Posted by Matthew Thomas

As explained in a previous post, while non-profits are typically tax-exempt, they still must file certain regular forms with the IRS to maintain their tax-exempt status.

On July 31, non-profit organizations that pay wages, tips or other compensation to employees must file Form 941 or 944 for compensation earned during April, May and June 2013.

Non-Profit organizations that are not 501(c)(3) tax-exempt organizations must also make a FUTA deposit for the 2nd quarter of 2013 if the deposit exceeds $500.00.

See IRS Publication 15 and Publication 15a for more information.

Design Group International can assist your organization with tax and other financial questions. Click on the link below to contact us about how we might work together.

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Topics: Matthew Thomas, Design Group International, Tax-Exempt, Non-Profit Organizations, Tax Filing

Non-Profit Leadership: Difference between Non-Profit and Tax-Exempt

Posted by Matthew Thomas

Most non-profit organizations are also tax-exempt. However, these tax exemptions do not typically free non-profits from paying all taxes. There is a vast amount of utter confusion surrounding the distinction between "non-profit" and "tax exempt". Let's take a look.

Non-Profit means that a business entity is incorporated such that "no part of its net earnings" (the money left after all of its expenses have been subtracted from its revenues, including the sale or trade of the entity's assets) "inures to the benefit of any private shareholder or individual." (26 USC 501(c)) (See http://www.law.cornell.edu/uscode/text/26/501)

There are a wide variety of organizations that fit this definition under the law, and state law governs what kinds of groups are allowed "corporation not-for-profit" status. Churches are often specified as a special type of corporation not-for-profit, but state laws differ.

Tax Exempt organizations are organizations that meet the requirements of the various taxing bodies with jurisdiction over the organization. Most famous in the United States is the Federal 501(c)(3) designation, referring to the third sub-paragraph of subsection (c) of Section 501 of Title 26 of the United States Code.

Nevertheless, there are other taxing bodies involved:

  • States - income taxes, sales taxes, certain excise taxes
  • Local Governments and Municipalities - income taxes, sales taxes, property taxes, other levies

Organizations that are tax-exempt may not be tax-exempt from all of these various taxes. It all depends on how the tax laws are written for each taxing entity. For instance, some churches are allowed a property tax exemption, while religiously-based non-profits for whom there is no worship service on the property may be required to pay property taxes, even though they are otherwise tax-exempt. In addition, tax-exempt organizations may still be subject to tax for income on trade or business unrelated to their charitable, tax-exempt purpose. 

Organizations, then, should take care to make sure they have complied with laws affecting corporations not-for-profit AND the laws (at various levels) regarding tax exemption. Note, too, that no matter what, almost every organization in the United States must still collect and pay payroll taxes for their employees.

We can assist you as you work with your board, executive team, attorneys and accountants to pursue your mission. Click the button below to continue the conversation!

 

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Topics: Matthew Thomas, Design Group International, Non-Profit Governance, Tax-Exempt

Non-Profit Leadership: Taxing Non-Profits

Posted by Matthew Thomas

In the past five years, many municipalities have struggled with tax funding. Declining real estate values, the continuing decline of American manufacturing and the increased costs of pensions and other payroll-related expenses have crippled local governments across the country. This has led some local leaders to look at some hitherto unusual (if not unorthodox) approaches to funding.

Of late, it is not unusual for politicians to propose taxing non-profits that had previously been tax-exempt at a local level. This, along with the parallel issue of ending, or significantly reducing, the charitable deduction on federal income taxes, challenges the non-profit funding model and their means of operation.

For the moment, let's focus on the idea of taxing non-profits themselves.

Providence, Rhode Island, for instance, proposed imposing property taxes on non-profit universities and hospitals in order to cover part of a significant budget shortfall. While the negotiations mostly backed off to be "PILOTS" (Payments In Lieu of Taxes), the drumbeat has continued that non-profits cost city budgets significant amounts of money, and therefore, should pay property taxes. In particular, some challenge that wealthy non-profits (typically hospitals and colleges) should not receive local tax-exemptions at all. Urbana, Illinois, along with its County Board, for instance, has challenged the property-tax-exempt status of both of the hospitials in the city in the last couple of years (with some level of deafening silence toward the state university that is also property-tax exempt).

In all of this conversation, it appears that the old assumptions about the social contract between governments, charitable organizations and the general public have broken down.

  • No longer is it assumed that charitable organizations benefit the community in a complementary way to government, and therefore receive privileges, like government organizations, to be tax-exempt.
  • No longer is it assumed in all cases that charities actually benefit their communities and the public good.
  • No longer is there mutual respect between the two types of organizations that they are working together to make their communities healthy and vibrant.

Now, new assumptions seem to be in place, at least in the minds of some:

  • That churches and charities are leeches on the public services carried out in communities;
  • That churches and charities serve their own interests, not those of the public;
  • That governments are more effective at taking care of public ills than charities and churches are.

It seems now, then, that the onus is on steward leaders of the charitable and religious organizations in local communities:

  • to explain what they are doing, and how it benefits the public;
  • to actually do things that benefit the community, not just their most stalwart members;
  • to deliver upon their vision of community transformation and the amelioration of social ills to bring actual results, rather than just stay busy doing it.

Then cities might again see churches and non-profits as benefitting their communities in a way that complements the services the governments themselves provide.

Then perhaps communities will challenge the arrogance that often grows out of the powers to tax, arrest and adjudicate that has led to the apotheosis of government in the eyes of some.

Until then, charities and churches have some work cut out for them to justify what was once a norm.

Until then, the PILOTS might be the best way for a few larger non-profits to show good faith to governments that once would have supported them.

If your organization is interested in the strategic work needed to reposition in changing times, we would be interested in working with you to do so. Click the link below to continue the conversation.

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Topics: Matthew Thomas, Design Group International, Tax-Exempt, Non-Profit Leadership, Local Government