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The results of a recent survey of nonprofit organizations conducted by GuideStar and another survey of associations conducted by Marketing General Inc. (MGI), both conclude that there has been a decline in revenues for nonprofits and associations for multiple, typically prosperous, funding channels.  These reports provide considerable insight into the affect of the current economic conditions on organizations. 

The results of a recent survey conducted by GuideStar on the impact of the economy on nonprofit organizations (primarily 501(c)(3) organizations) shows that the current recessive state of the economy continues its unrelenting drain on the funding lifeline of the sector, where four out of 10 organizations reported a decline in contributions for the first five months of this year (January 1 – May 31, 2010), as compared to the same period in 2009.

In addition, 28% of the respondents reported no change in contributions and out of the 40% reporting declines in funding, 26% categorized the decline to be significant. Furthermore, 66% of those surveyed attributed the declines to reduction or discontinuation in funding from private foundations, and 30% contributed the decline to reduced government support. However, the number one reason for the decline was reportedly in individual giving at 67%.

The survey was primarily focused on mission oriented organizations with 92% of the respondents being public charities.

The study conducted by MGI surveyed associations (primarily 501(c)(6) organizations) to determine their largest revenue source, also reported declines, although not in contributions as expected, but in membership dues. Over 400 associations were surveyed and the report shows that one out of two associations experienced some level of member attrition in 2010, as compared to 2009.

The report presents grim news for association executives with losses in recruitment and retention (retention more than recruitment). Of all respondents, 44% reported declines in membership dues over the past year with a significant number of respondents reporting “lack of value” as the top reason for not renewing by members.

The IRS announced a one-time relief opportunity for tax-exempt organizations that have failed to meet annual filing requirements for three consecutive years.   This one-time relief benefits Form 990-N (e-Postcard) and Form 990-EZ filers only.  Organizations required to file Form 990 or Form 990-PF are not eligible and their exempt status is automatically revoked if they fail to file for three consecutive years.
Click here to see the List of Organizations at risk of automatic revocation of tax-exempt status.  The organizations on the list have return due dates between May 17 and October 15, 2010, but the IRS has no record that they filed the required returns for any of the past three years.  Two types of relief are available for small exempt organizations – a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard), and a voluntary compliance program for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt from Income Tax.

The IRS will keep the list of at-risk organizations on its web site until October 15th.  Organizations that have not filed the required information returns by that date will have their tax-exempt status revoked, the tax agency stated, and the IRS will publish a list of the revoked groups in early 2011.  Donors who contribute to at-risk organizations are protected until the final revocation list is published.

If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status.  Any income received between the revocation date and renewed exemption may be taxable to the organization.

On September 8, 2010, Obama proposed a 100 percent bonus depreciation tax incentive for 2011 and asked Congress to make the research-and-development (R&D) tax credit permanent.

Obama proposes to increase the current 50% bonus depreciation deduction to 100%, retroactive to September 8, 2010. This deduction applies to purchases of equipment such as vehicles, solar panels, and computers.

The Administration hopes to encourage business investment and support the business community by making the R&D tax credit permanent and increasing bonus depreciation.

Don’t buy any equipment just yet. We’ll inform you once Congress has voted.

A number of our clients have run into a brick wall trying to secure working capital and lines of credit from their bank. Large and small banks underwriting for small business loans have become increasingly stringent. Banks reluctance to lend money is understandable, given the increased regulatory pressures on banks and the financial impact of the poor economy on the balance sheets of many of our clients.

McQuadeBrennan’s pro-active client services have found an interesting solution to the lack of credit available to many of our small business clients, non-profit associations, and private equity managers.

The Receivables Exchange is an online service that matches investors (lenders) with companies and organizations that seek to liquefy its receivables. The Exchange is an innovative cash flow solution that assists company’s access to work capital. The New York Times referred to The Receivables Exchange as the “eBay of working capital.” Here’s how it works. Let’s say you are a non-profit organization with recurring (or nonrecurring) receivables from long standing members that may be getting old for some reason. After you have registered as a client of The Receivables Exchange, you would post the dues, or accounts receivable, you want to liquefy. Investors will complete for your business by effectively bidding an interest rate for the receivables you posted with The Exchange. The average rate charged to participants in The Exchange is 1 ½% per month, but your initial transactions may be more expensive until investors get comfortable with your organization and track record.

The investors who supply the liquidity are largely institutional, and include hedge funds and investment banks. An account is established in your organization’s name at JP Morgan, and you direct your receivable to make payment directly to the account, so you maintain complete confidentiality.

The application process is fairly extensive, but after you are up and running, the posting of receivables and cash transfers becomes fairly routine.

Coming down the pipeline and ignored by Congress, is a waterfall of potential tax increases, the likes of which we haven’t seen for a decade. The massive amounts of legislation this year coupled with sunset provisions create a perfect storm for taxpayers.

The recent healthcare legislation was also a tax bill. From a new tax surcharge on tanning salons, all the way to altering the way millions of Americans purchase medications. If you have grown used to using your flexible spending account (FSA), health savings account (HSA), or a similar vehicle for non-prescription medications – other than insulin, these medications will now have to be purchased with after-tax dollars.

The healthcare legislation also limits the dollars that can be placed in an FSA to $2,400, drastically limiting the tax advantages. This limitation will have a particularly severe impact on disabled individuals and parents of disabled children who have used pre-tax dollars to pay for expensive treatments, medical devices, and related education.

After January 1, 2011, it will be much more expensive to die; the “Death Tax” returns, taxing up to 55% on an estate of $1 million, a threshold that will be surprisingly easy to reach.

The tax ratio in effect since the early 2000s will be rolled back: the lowest bracket will go from 10% to 15% and the highest from 35% to 39.6%. This will be in addition to narrower tax brackets for taxpayers filing jointly, a significantly lower child tax credit, lower adoption credit, lower dependent care tax credit, and a lower standard deduction.

Retirees will pay both higher capital gains tax, going from 15% to 20%, and higher taxes on dividend income, going from 15% to 39.6%. Charitable contributions from IRAs will be discontinued, and rules governing student loan interest deductions are changing, for the worse.

There’s more.  If you currently receive health insurance, your W-2 will show a big gain next year, but not in a good way. You will magically have more gross income, monies that you never saw, that went to purchase health insurance will now be taxable income; this has the potential to push taxpayers into higher brackets even though they never saw any additional net earnings.

Businesses will also be hit with tax increases with significant changes in what can and cannot be deducted. Business tax brackets are set for a similar shift as individual taxpayers. Small, job creating, businesses that are used to expensing equipment purchases up to $250,000 will see the decimal in a different place as the ceiling decreases to a mere $25,000. One of the most notable business tax credits that is being eliminated is the research tax credit, although it has repeatedly been extended, its political future is unsure at best. There are a plethora of other changes, and their implementation and enforcement specifics are still up in the air. 

Finally, Congress has repeatedly raised the Alternative Minimum Tax dollar threshold, which is not tied to inflation, and is likely to do so in the future.  As of today, many middle class taxpayers are subject to this “backup tax” in 2011. 

Hopefully, Congress will scrutinize many of these tax increases.  Though they were designed to pay for current legislation, the political will to maintain them is questionable. The tax code is tedious, but it is changing quickly, and will continue to do so. We’ll keep you posted.

On Thursday, March 18, 2010, the IRS announced two new tax benefits available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the new Hiring Incentives to Restore Employment (HIRE) Act.

Payroll Tax Incentive

Employers who hire unemployed workers after Feb. 3, 2010 and before Jan. 1, 2011 may retain the employer portion of the Social Security tax ordinarily paid. Employers are exempt from paying their 6.2 percent of Social Security taxes on wages paid after March 18, 2010.  This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2 percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.

New hires filling existing positions also qualify, but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify.

In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked less than a total of 40 hours for someone else during the 60 day period. The IRS is currently developing a form employees can use to make the required statement.

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.

Employers may claim the payroll tax benefit on the federal employment tax return they file quarterly with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010.

 Section 179 Deductions Extended

Are you considering purchasing new office computers or furniture? Well, you’re in luck! The HIRE Act also extends Section 179 for one year.  Visit our previous blog post to determine qualifying property.

The New Year brings five significant changes to consider as you prepare your 2009 federal income tax return.  These changes generally provide opportunities to decrease overall tax liability through increased deductions, taxpayer credits and more. 

When preparing your 2009 return consider these five changes:

1. The American Recovery and Reinvestment Act (ARRA) provides significant incentives for taxpayers. These include: 

- Those purchasing a home or improving energy efficiency.

- Those purchasing a car.

- Parents and students paying for college.

2. Expansion of IRA deduction to those covered by a retirement plan with adjusted gross income of less than $65,000 (single) or $109,000 (married filing jointly).

3. Increase in the Standard Deduction to $11,400 for those married and filing jointly, and $5,700 for singles and those who are married and filing separately.

4. Change to the standard mileage rate to $.55 per business mile.

5. Increase of investment income a child may receive ($1,900) without being taxed on their parents’ return.

The Small Business and Entrepreneurship Council (SBE Council) released the 14^th annual Small Business Survival Index 2009: Ranking the Policy Environment for Entrepreneurship Across the Nation. The index ranks states based on their public policy conditions for small businesses and entrepreneurship. Hometown Washington, D.C. was ranked dead last this year and Maryland, not much better, was ranked 37^th. However, Virginia was ranked 10^th.

The rankings are based on taxes, regulatory costs, government spending, property rights, and health care and energy costs to determine which states are the friendliest to small businesses. Virginia’s success is easy to explain – low tax rates. D.C. and Maryland refuse to address their job killing corporate tax rates. Around this time last year, I made a case for the elimination of the D.C. corporate income tax.

When pigs fly…

Click here to view the complete report.

Low inflation contributed to a five cent drop in standard business mileage reimbursement rate for 2010. Effective January 1, 2010, the mileage reimbursement rate for business and medical and moving expenses have changed, but the mileage rate for charitable organizations has remained the same.

The IRS announced the 2010 optional standard mileage rates beginning January 1, 2010:

-          50 cents per mile for business miles driven

-          16.5 cents per mile for medical or moving purposes

-          14 cents per mile driven in service of charitable organizations

Limitations

The business standard mileage rate cannot be used to compute the deductible expenses of automobiles used for hire, or five or more automobiles owned or leased by a taxpayer and used simultaneously. In addition, a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

Currently, there are approximately 200,000 riders and 4,000 employers participating in Metro’s SmartBenefits program. The program allows employees to set aside of a portion of their salary, before taxes, for transit expenses. Metrorail, Metrobus and regional bus fares, parking at Metro lots and registered van pool expenses are loaded onto a SmartTrip card each month at vending machines located in Metro stations.

Metro has proposed the following program changes:

- Workers would be required to set an amount for transit rides and transit parking, a new requirement.

- Unused transit and parking benefits for the month would be returned to the employer, instead of rolling over. This change upset many employees, since some employers had decided to keep the funds and not credit employees.

- Riders will not need to visit vending machines each month to download their benefits. Instead, the transaction will occur at the fare gate, bus box, or parking exit. The program will use the new cards like debit cards, deducting used amounts from the benefit amount set aside for the month.

These changes were going to be effective Jan. 1st, but due to the volume of complaints from employers and employers, Metro has decided to postpone the transition another year to give employers and employees more time to review the proposed changes to the program.

IRS has agreed to the extension although a formal request is pending. Metro says the changes are needed to protect the benefit system from misuse and that the additional time will allow them to make other planned improvements to the program as well.