3 KEY ELEMENTS Preserving tax exempt status loss of contributions, federal aidMinimizing tax liability:InstitutionEmployeesDonors/donor relationships
4 Topics for Discussion Payroll and Employment Tax Issues Nonresident AliensEmployee vs Independent ConsultantFringe BenefitsAccountable PlansUnrelated Business Income Tax (UBIT)Intermediate Sanctions
5 Topics for Discussion Tax Exempt Bonds Charitable Contributions Lobbying and Political ActivityOther ResourcesIRS Priorities for Nonprofit Review & Other Legislative AgendaRisk Management Issues
6 Payroll and Employment Tax Issues Employment Tax Responsibilities Reference: IRS Pub 15 Circular Ean employer-employee relationship (not independent contractor)the payment of wages (settlements, N.Dakota case)the payment must be made with respect to employment
7 Payroll and Employment Tax Issues Payment and Reporting ObligationsElectronically remit payments withheld“If you accumulate $100,000 or more of taxes on any day during a deposit period, you must deposit the tax by the next banking day, whether you are a monthly or semiweekly schedule depositor”Report covered wages paid on Form 941Employers Quarterly Federal Tax Return – does not include wages of non resident aliens which are treaty exempt.
8 Payroll and Employment Tax Issues IRS PenaltiesFiling late or incorrect information returnsIf no $ is due have an additional 10 daysFiling late or incorrect payee statements$50 per statementDepositing tax withholding after the deadline1-5 days = 2% Greater 15 days 15%Not filing or depositing at allMax penalty is 25% of taxes dueER STILL RESPONSIBLE IF USING PAYROLL SERVICE. ESTABLISH “REASONABLE CAUSE” INTEREST & PENALTIES.
9 Payroll and Employment Tax Issues Income Tax WithholdingOn wages, salaries, and bonuses, unless a specific exemption exists – not on treaty wages of non resident aliens, or foreign earned income exclusionFringe benefits not excluded by the IRC, such as season tickets and personal use of automobiles, spousal travel, and club duesEmployers Tax Guide to Fringe Benefits Pub 15B
10 Payroll and Employment Tax Issues Graduate Student StipendsAs payment for services renderedAs a grant, scholarship or fellowshipNeed to allocate between the service component and the scholarship component. How much does your institution pay for similar services to regular staff?
11 Payroll and Employment Tax Issues Settlement Payments – Prior to Aug 1996 most settlements were tax freeNon-ReportablePayment based on tort or tort-type rights (injury or wrongful act)Personal physical injuries or physical sickness - IRC 104 (a) (2)ReportableEmotional distressAttorneys’ feesPrior to Comm. vs Bonds, 543 U.S. 426 the courts were divided, the Supreme Court settled the issue, attorneys fee payment represents taxable income to the plaintiff thereby imposing the withholding requirement.Twist: Newhouse vs McCormick, 157 F 3rd 582 (8th Cir 1998) Ind. brought an age discrimination case against a Prospective Employer, “rejected for the position.” The court held that since the ind. was a job applicant and not an employee, was not subject to taxes.
12 Payroll and Employment Tax Issues FICA ExclusionsCertain nonresident aliensindividuals in the US on F-1, J-1, M-1, or Q-1 visas qualify under section 3121(b)(19) of the IRC- Services performed for certain churches or church-controlled organizationsStudent FICA exceptionWhile regularly attendingclasses
13 Payroll and Employment Tax Issues Student FICA ExceptionPrimary Function of InstitutionSchool, College, or University § (b)(10)-2 (2005)formal instruction, regular faculty & curriculum, regularly enrolled student bodyCareer Employees/Professional Employees - not eligibleWork >=40 hours per week regularlyParticipate in RetirementRequired to be LicensedWork requires advanced knowledgeWork requires discretion and judgmentWork is intellectual and varied
14 Payroll and Employment Tax Issues Student FICA ExceptionMedical Residents
15 Payroll and Employment Tax Issues Worker ClassificationOriginally IRS relied on the twenty common law factors (Rev. Rul )Behavioral ControlInstructionsTrainingFinancial ControlSignificant InvestmentExpensesOpportunity for Profit or Loss
16 Payroll and Employment Tax Issues (cont.) Worker Classification (cont.)Relationship of the PartiesEmployee BenefitsWritten ContractsServices are a key aspect (Faculty, Coaches)Permanency of the positionPenalties for misclassification, including payment of taxes that should have been withheldRelief under Section 530 of the Revenue Act of Reasonableness, Case law.Audit alert: The IRS is once again investing resources in this area. The tax gap has been a driving force. Examiners will review for persons receiving both a W2 and The good news is that the IRM will be updated with the details.
17 Nonresident AliensLaws date back to the early 1960’s. Tax Reform Act of 1986 made the most significant changes in terms of redefining the “sourcing” rules of scholarships.Who are Nonresident AliensStudents, faculty, performers, lecturersTax residency status IRC 7701(b)Green card test (Permanent Res. Treat Like a US person)Substantial presence test (determines if you are an NRA or a RA) current yr at least 31 days, previous 1/3 days, second preceding 1/6 if sum is equal to or greater than 183=RA
18 Nonresident Aliens When is Tax Withholding Not Required Foreign-sourced income IRCNRA students who are abroad on scholarships, Web and course design outside of the US, work performed outside the US, scholarships from outside US.Internal revenue code exemptionMostly qualified scholarships under IRC 117.Exempt under an income tax treatyCurrently there are about 60 tax treaties.
19 Nonresident Aliens Systems that Process Payments Taxable to NRAs Student Accounts - ScholarshipsAccounts Payable – Honorariums, Prizes, Performers, Lecturers (Never on a Form 1099)Payroll – Students and facultyGathering data: FNIFAudit activity: focused exams – open door program. VCP.
20 Fringe Benefits § 132 Enacted 1984 (DEFRA ’84) “Deficit Reduction Act” included the term “fringe benefit”Any property or service (or cash under certain circumstances) that an employee receives from an employer, in lieu of or in addition to regular taxable wages, is a fringe benefit that may be subject to taxation.A statutory exclusion must exist in order for the benefit to not be taxable..
21 Fringe Benefits Employee benefits handbook Reporting requirements PenaltiesRecordkeeping requirements – no records-taxable incomeIRS audit activityEmployee benefits handbookUnion AgreementsEmployment contracts (especially those of executives)Corporate minutesChart of accountsWritten policies and procedures regarding fringe benefitsA/P Journal, G/L Accts that include ee benefitsPayroll JournalExaminers will look at expense categories that are less obvious but may include fringe benefits such as misc expenses, auto expense, ins & travel reimbursements.IRM 4,23, 5,11.5 ( )
22 Fringe BenefitsExamples of benefits that may be entirely or partially excluded from the taxable income of an employee:qualified undergraduate tuition reduction for dependents §117certain insurance, up to a certain levelhealth and disability insurance; IRC 105group-term or other life insurance ($50,000 limit) IRC 79personal liability insurance
23 Fringe Benefits Dependent care assistance (IRC § 129) Use of athletic facilities, subject to certain conditionsAutomobile allowances or use of an employer’s automobile for business purposesTravel benefits, including recruiting, fundraising, attending conferencesAwards for length of service and safety achievementThe length of service and safety achievement awards must be awarded as part of a “meaningful presentation”, Regs (3)Less than $1,600 (cannot be cash) if written plan – no management or executives
24 Fringe Benefits Employer-paid transportation($115) or parking($220) Free or discounted admission to university sponsored eventsCafeteria plan benefits §125 Flexible spending acctsmedical/dental/vision expensesgroup term life insurance §79 greater $50k taxabledependent care assistanceadoption assistanceMoving and relocation expenses §217IRS Pub 521 Form 3903 (meals, real estate, house hunting & temp living expenses are taxable)
25 Fringe Benefits Qualified Employee Discounts §132 ( c ) No Additional Cost Services §132(b)Working Condition Fringe Benefits §132(d)May be provided on a discriminatory basis. Employee can deduct on return. Related to the employee’s work.Di minimis Fringe Benefits §132(e)Bookkeeping is a burden. The free turkey. Certificate is taxable, turkey not taxable.Qualified Moving Expense Reimbursements §132(g)Qualified transportation fringe benefit §132(f)Gifts (less than $15), Free Stuff (expensive door prizes),
26 Fringe Benefits Employer-Provided Cars (listed property) Employer-Provided Cell Phones (listed property). Current IRS position, absent detailed substantiation, it will be 100% taxable to the ee. If legs passes they will be treated like all other fringe benefits including the desk phone. For latest developments check H.RLodging & Meals Provided for the Convenience of the Employer§ 119Educational Assistance §127 Max $5,250Employee Business Expense Reimbursements (Accountable Plans)IRC 274(d)-must be a business expense-verify and substantiate-return any unused portion
27 Accountable Plans Business Connection IRC 162 The amount must be paid for business expenses paid or incurred by the ee in connection with the performance of services on behalf of the er.SubstantiationAmountTime and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift,
28 Accountable Plans Substantiation Business purpose of the expense or other itemthe business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the giftExpense advance must be reasonably calculated to cover expensesEmployee must substantiate within 60 daysMust return unspent allowance within 120 days
29 Unrelated Business Income Tax A little history…Prior to 1950 tax exempt organizations could engage in unrelated business activities. Then along came NYU School of Law with it’s subsidiary the Mueller Macaroni Company. Mueller Co. v. Commissioner, 190 F.2d 120 (1951).Income is from a trade or business “production of income”The trade or business is regularly carried on by the organization (frequency, continuity, and how it is carried on)The trade or business is not substantially related to the institution’s tax-exempt functions “mission”
30 Unrelated Business Income Tax ExceptionsConvenience businesses (laundry operated for students)Research (for the public interest-inc tech transfer to private sector for testing)Corporate Sponsorships (no substantial return benefit other than the use or acknowledgment of the name or logo – cannot say that coke is better than pepsi)Certain types of income (received in a passive manner)
31 Unrelated Business Income Tax (cont.) Income ExceptionsInvestment income IRC § 512(b)(1) (interest, dividends and annuity income)Rent IRC § 512 (b) (2) (no not provide cleaning services)Royalty income (trademark, copyright)Capital gains IRC § 512 (b)(5) (excludes all gains or losses from the sale, exchange, or other disposition of property)
32 Unrelated Business Income Tax Unrelated Debt Finance Incomeproperty held to produce income to which there is acquisition indebtedness
33 Unrelated Business Income Tax Corporate SponsorshipsQualified Sponsorship Payments (money, transfer of property, performance of service)Substantial Return Benefit (exclusive provider arrangement, goods, facilities, services, rights to intangible assets)Use or Acknowledgement (value neutral descriptions)
34 Unrelated Business Income Tax Corporate SponsorshipsAdvertising not per se a return benefitMessages containing qualitative or comparative languagePrice information or other indications of savings or valueAn endorsement or an inducement to purchase, sell, or use the products or services
35 Unrelated Business Income Tax Corporate SponsorshipsExclusive ArrangementsExclusive sponsorshipExclusive provider of goods and servicesInternet Sponsorships (hyperlink with no other information)Periodicals (student run newspapers)
36 Unrelated Business Income Tax Travel Tours – (if structured as an -educational activity no UBIT (Rev Rul )Rental of Facilities (if provide meals and maintenance will be UBIT)Fitness Facilities (who is being served & how much is being charged)
37 Unrelated Business Income Tax ReportingForm 990-TNew public disclosure requirementsIRS NoticeQuarterly paymentsIRS Publication 598 UBIT
38 Intermediate Sanctions An excess benefit transactionis any transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any “disqualified person,”if the value of that economic benefit exceeds the value of the services provided by the disqualified person.
39 Intermediate Sanctions Applicable tax exempt organization501(c)(3) or 501(c)(4) tax exempt public charityIncludes higher educationDoes not apply to for profits
40 Intermediate Sanctions Disqualified personsSubstantial influenceFamily membersEntities in which any of the above own more than a 35% interestFacts and circumstances test
41 Intermediate Sanctions Organization Managerstrustee, director, or officer, has similar powers to trusteesRebuttable Presumption of ReasonablenessIRS noticearrangement approved by an independent body - boardboard obtained & relied on appropriate comparable dataBasis for determination was adequately documentedTax Penalties to insiders and possible loss of tax exemptionIRS Publication 557 Tax Exempt Status
42 Tax Exempt BondsArbitrage – the act of making money w/ money. Borrow at a low rate at the taxpayer’s expense. With a few exceptions money must be rebated to the gov.Private Use Issues501(c)(3) threshold - §145, 5% of net proceeds for unrelated use including issuance costsGovernmental entity threshold -10% unrelated useIssuance costs – capped at 2% counts twds private use
43 Tax Exempt Bonds Private Use Issues (cont.) Research agreements – original investigation for the enhancement of scientific knowledge – no commercial objectiveRental incomeNaming rightsRecord retention requirements – for as the long as the bonds are o/s & three yrs after the final redemptionAudit alert: TEB division of the IRS has increased staff by 20%. Cliff Gannett the Director states this will increase significantly, the number of audits. The twenty page FY2008 TEB work plan can be found at IRS.gov. Some of the areas under scrutiny include: yield burning, tax and revenue anticipation loans, 501 ( c) 3 charities.
44 Charitable Contributions Qualifying donationsQualifying donees § 170 ( c )-must be a US entitystate & local, religious, charitable, educatioal, veterans org, non profit cemetery companiesDetermining the amount and limitations on deductions -based on donor A.G.I. & Donee, & type of propertyRecordkeeping and substantiation requirements.
45 Charitable Contributions Elements of a Charitable DonationCharitable intent detached, disinterested generosity (Comm vs. Duberstein 363 US 278 (1960))No substantial benefit to the donor, complete, voluntary and unconditionalDelivery org must have full controlAcceptance by the doneeQuid pro quo gifts part gift and part consideration for good or service
46 Charitable Contributions Types of ContributionsCash – check, credit card, prom note, IRA’s, mailed though not recd on 12/31 is deductible § 1.170A-1bStocks and bonds – fmv at date of giftReal estate – Conservation easements – a lot more scrutinyTangible personal property – anything you can touch other than lands or bldgs.; full fmv if inst does not dispose in yr given – does not apply to vehiclesIntangible personal property - i.e. life ins contracts, oil and gas interest (very complex subject to UBIT)
47 Charitable Contributions Types of Contributions (cont.)Services and out-of-pocket expenses – no deduction for the value of the servicePrizes and awards as giftsRecipient does not take into income if certain conditions apply: r’cd because of charitable purpose or civic engagement (Nobel prize), no action performed, does not have to perform service and gives the prize to a charityIRS Publication 526, Charitable ContributionsIRS Publication 561, Determining the Value ofDonated Property
48 Lobbying and Political Activity Restrictions on Lobbying ActivitiesDefinitions of lobbying-retained for financial or other compensation; makes at least two lobbying contacts; 20% of time in a three month period engaged in lobbyingLobbying election- pros & consLobbying Disclosure Act- 1995applies 1.) one ee that is a lobbyist 2.) spends at least $10k per calendar quarterLobbying expendituresReporting requirements–electing & non electing must rpt on Form 990 Sch. A as well as to maintain records that will enable them to calculate and report expenditures
49 Lobbying and Political Activity Definition of Candidate§1.501 ( c ) (3)-1( c )(3)(iii) “an individual who offers himself, or is proposed by others, as a contestant for an for an elective public office, whether such office be national, state, or local”Public Office no IRS definitionIntervention in a Political CampaignRev. Rul Lists 21 Examples of what is allowed and not allowed
50 Political Activity Permissible Political Activities Candidate debates and forumsequal opportunity, no fundraising, explicit statement indicating that the inst does not endorse a candidateStudent newspaper endorsementsmay publish editorials Rev. RulUse of institutional facilities – no problemneeds to state that inst does not endorse and no fundraising
51 Permissible Political Activities Voter registration on campushigher ed amendment 1998 required to make forms widely available to studentsOther voter educationvoter guides must not be biased in favor of a candidateCourse credit for participation in political campaignsRev. Rul cannot indicate for which party -must be an elective course
52 Resources Tax Department Internal Audit External Auditors Payroll, Human Resources & Other Dpts.
54 Resources (cont.) http://www.windstar.com/ NRA assistance NRA tax preparationEO Tax UpdatesSend a blank to
55 Resources (cont.) Mr. Lowell G. Hancock Internal Revenue Service LMSB InternationalForeign PaymentsInternational Information ReportingSE:LM:IN:C:FPTel Fax:Internal Revenue ServiceFederal Bldg / U.S. Courthouse2 South Main Street., Room 395Akron, OH
56 Resources (cont.)Guide to Federal Tax Issues for Colleges and UniversitiesLoose-Leaf BinderCD-Rom Updated QuarterlyFederal Tax News for Colleges and UniversitiesClick on Subscription Services in the left hand columnThe Tax Law of Colleges and Universities, 2nd Ed.Bertrand M. Harding, Jr.Employee Benefit Plans: Audit and Accounting GuidePublisher: AICPANACUBO Guide to IRS Audits Laura Kalick, Peter K. Scott
57 RESOURCESTaxation of Charities and Other Exempt Organizations (West Publishing Co, 2003 Moran, Brennen, Jones and Willis).A Federal Income tax Guide for College and University PresidentsAmerican Council on Education(free download)
58 Resources (cont.) Income Tax Treaties (A-Z) Revenue Rulings Online Publication 901, U.S. Tax TreatiesPublication 515, Withholding of Tax on Nonresident Aliens and Foreign EntitiesPublication 519 , U.S. Tax Guide for AliensRevenue Rulings Online
59 Resources (cont.) Internal Revenue Code Revenue Rulings Online Revenue Rulings OnlineIRS Website for Students
60 Resources (cont.) NACUBO Tax Forum October 6 -7, 2008 Chicago, IL Tax Workshops and PresentationsTax Institute for Colleges and Universities (TIFCU)May 17-19, 2009Indianapolis, INNACUBO Tax ForumOctober 6 -7, 2008Chicago, IL
61 IRS Priorities for Nonprofit Review & Other Legislative Agendas A. IRS Sets Priorities for Nonprofit Review in 2008Interview with Lois Lerner – Director IRS Exempt- organization Division (12/20/07)B. United States Senate Committee on Finance(Baucus, Grassley) Write to 136 Colleges, Seek Details of Endowment Pay-outs, Student Aid (1/24/08)C. Tax-Exempt Bond Financings Compliance Check Questionnaire Form 13907(TEB Work plan FY 2008)D. Exempt Organization Executive Compensation Compliance InitiativeE. CEP and other examinations in higher educationF. Governance ConcernsG. Form 990 RedesignH. Form 990T Public Disclosure Requirements
63 WITH APPRECIATION Associate Vice Chancellor of Finance Susan BrooksAssociate Vice Chancellor of FinanceUNC Charlotte 414 Reese Financial Services Charlotte, NCBeverly I. Moran Professor of Law and Sociology Vanderbilt University Law School st Avenue South Nashville, TN 37203College Business Management Institute & The University of Kentucky