Nick Magone, CPA, CGMA, CFP®

6 Tips to Maintain Your Nonprofit’s Tax-exempt Status

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Once you’ve completed the process of securing your nonprofit’s tax-exempt status, the last thing you want to do is lose it. If you lead a 501(c)(3) organization, be sure to familiarize yourself with the IRS’s tax-exempt rules and prohibited activities to keep your status in good standing.

1. Political campaigning. 501(c)(3) nonprofits are banned from participating in any political campaign for or against a candidate running for public office. This applies to campaigns on all levels, including federal, state and local elections.  Your organization will be in violation of the rule if it makes contributions to political campaign funds or issues public statements favoring or opposing a candidate. However, your nonprofit is allowed to engage in certain activities promoting voter registration and participation. It can also provide voter information, as long as it remains neutral.

2. Lobbying. Lobbying is defined as attempting to persuade members of a legislative body to propose, support, oppose, amend or repeal legislation. Essentially, your organization can’t try to convince a legislator to vote a certain way. As long as lobbying doesn’t represent a “substantial part” of your nonprofit’s overall activities, it generally won’t harm your tax-exempt status. But what you consider insubstantial may differ from the IRS’s definition. Consult your tax advisor for further details.

3. Unrelated business income. Nonprofits are not designed to make money, but that doesn’t mean your organization can’t earn income, as long as it furthers your tax-exempt mission and meets several other legal tests. A nonprofit’s unrelated business income is taxed at the same tax rate as corporate income. This tax is commonly known as the unrelated business income tax (UBIT) and is triggered when an organization’s annual income exceeds $1,000.

4. Annual reporting. You can’t simply apply for and receive a tax-exempt status, then forget about it. Your organization must also satisfy regular reporting obligations (with certain exceptions for most faith-based organizations), including filing these federal forms:

    • Form 990, Return of Organization Exempt from Income Tax
    • Form 990-EZ, Short Form Return of Organization Exempt from Income Tax
    • Form 990-N, Electronic Notice (ePostcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-E

Your state may also have reporting requirements, so check with your attorney or advisor for details.

5. Private benefit inurement. No part of a 501(c)(3) organization’s net earnings may inure to the benefit of a private shareholder or individual who has the opportunity to benefit. This prohibition is aimed at preventing insiders from profiting from their charitable services. Board members, officers, directors and other key employees all qualify as insiders. The ban against private inurement includes payment of dividends, unreasonable executive compensation arrangements and transfers of property to insiders for no or below-market value.

6. Stated purpose. Your tax status may be jeopardized if you stop operating in accordance with your stated tax-exempt function. This is harder for the IRS to monitor. In general, the tax agency only acts when a nonprofit admits it’s no longer following its own mandate. For example, an organization may come under scrutiny for failing to file annual reports. The IRS investigation may subsequently indicate that its exempt function has changed.

Protect your status as a nonprofit

Spend more time championing your cause, and less time worrying about the IRS. NJ CPA firm Magone & Company can help. Give us a call today at (973) 301-2300 to learn more.

Ready to Cash Out on Your Home? Beware of Capital Gains

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Home values around the country are soaring. The median price tag on a single-family home in the U.S. jumped 23% since last year. While it seems like a huge advantage for sellers, there’s one factor that may put a damper on your profit: capital gains taxes.

Your home is a capital asset, so the capital gains tax is what you pay on its appreciation from the time of purchase to the time of sale. The exact amount will depend on your income, your tax filing status and how long you’ve owned the home. And it could mean handing over more than you’d like to Uncle Sam.

The good news? There are some fairly simple strategies to help minimize the capital gains you’ll have to pay on a home sale.

Determine if you’re eligible for an exclusion. If you’ve owned your home for at least two years, then up to $250,000 of profit is tax-free — or $500,000 for married people filing jointly. But to qualify, there are other requirements that must be met:

  • You must live in the home for the majority of the year.
  • You must provide proof of residency (voter registration, utility bills, a tax return, etc.).
  • It must a reasonable distance from your job.
  • For married filers, you and your spouse must claim the same residence.

Factor in adjustments to the cost basis. Did you put on an addition? Renovate the kitchen? Install new central air conditioning? All of these home improvements increase the cost basis of your home. Your cost basis includes the price and acquisition costs of your home, plus a laundry list of property-related expenses. So if you purchased your home for $400,000 and sell it for $500,000 five years later, it may sound like you have a $100,000 capital gain. But if you spent $50,000 on renovations, your cost basis will be $450,000, lowering your taxable gain to $50,000.

Sell when your income is at its lowest. If you were recently laid off, took a pay cut or newly retired, it might work to your advantage. Because your capital gains tax is determined by your tax bracket, a dip in income could have a positive impact on how much you’re expected to pay.

No one wants to pay high taxes on a home sale...

Your home is likely your life’s biggest purchase. When the time comes to sell it, make sure you’re getting back every penny you’re entitled to receive. Reach out to the experts at Magone & Co at (973) 301-2300, and we’ll schedule a no-obligation confidential consultation to explain your options.

The Skillset of the Modern CFO: 4 Essential Qualities for Success

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Today’s CFOs find themselves asking…

Am I analyzing the best metrics for profitability?

Do I understand the resources available to me now?

Is my organization primed to adapt to the continued financial uncertainly from the pandemic?

Amidst the rapidly changing business climate, corporate finance leaders need to stay a step ahead. Strategic decision making has never been more critical. The explosion of technology, data and analytics has offered CFOs the ability to better forecast, plan and budget.

If that’s you, you better be on board with the changing times and ready to expand your role. Here are four qualities that are now an essential part of a CFO’s skillset:

  1. Strong technological capabilities. The latest technology is a huge asset, especially when it comes to financial decision-making. Those who can master automation, analytics and process mining tools can respond faster to change, drive better performance and expand your capability as a strategic thinker. The best CFOs leverage new technologies to gain insights and make them actionable.
  2. Advanced listening skills. Listening is an important skill for any business leader, but today’s CFO are tasked with empowering teams, giving advice and counsel, and providing a voice of reason. Think of it this way: You’re not responding to requests for solutions, but working together to uncover the reasons behind the issues.
  3. An agile approach to forecasting. “Bigger picture” thinking is needed across the board to help ensure organizational longevity. Business can change overnight — as we’ve seen since the onset of the pandemic. Adopt a more responsive approach that steers away from structured forecasting, and instead continuously ask questions and formulate scenarios that anticipate change.
  4. Top-notch collaboration skills. Modern CFOs look beyond finance and keep up with the challenges across other areas of business by teams at every level. This offers increased visibility into how finance can partner with different units and better understand what your organization really needs to succeed.

An opportunity for reinvention

Consider the skills, qualities and personality that your organization needs in a CFO, as the role grows beyond its traditional functions. Having the right financial leader at the helm will better position your organization for challenges that lie ahead.

Don’t have a CFO on board yet? At Magone & Co, we offer outsourced CFO services that align with your organization’s mission and goals. For more information, reach out to us today at 973-301-2300 to request a free consultation.

 

COVID-19 is Accelerating Your Risk of Fraud. Here’s How…

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Did you know that half of U.S. companies uncovered more fraud after the COVID-19 pandemic began than before? So if your business is finally welcoming employees back in person, don’t be surprised if you discover an increased incidence of scams and corruption.

Read on for guidance on how to position your company for a fraud-resistant future.

Assessing new risks as business vulnerability increases

If most of your employees worked from home during the pandemic, managers may have found supervising their activities a challenging task. Even if you kept workers physically on the job, it’s likely been difficult to maintain the usual supervisory levels and anti-fraud procedures in the new world of work.

In either scenario, you may have unknowingly created greater opportunities for dishonest employees to steal. Your employees may have also fallen victim to fraud schemes committed by third parties, such as customers and suppliers — and especially cybercriminals.

Now’s an ideal time to evaluate your internal controls with a fraud risk assessment (FRA). An FRA identifies the potential schemes facing your organization and the processes that can help detect or prevent their occurrence.

For example, let’s say you pivoted from making perfume to producing hand sanitizer during the pandemic. An FRA can look at your vendor vetting and new-hire processes to determine if you require new, more rigorous ones. If you’re now selling products primarily online, an FRA can assist in determining if your cybersecurity protections and payment systems are fit for the job.

Investigating misconduct and building your case

If your FRA reveals a suspicious transaction or an employee makes a fraud allegation, don’t wait to investigate. According to a report by the Association of Certified Fraud Examiners, typical fraud results in a median loss of $8,300 per month — a significant number for the majority of companies.

A thorough fraud investigation requires knowledge of employment law and advanced accounting principles, as well as tremendous attention to detail. A fraud expert — usually a CPA or forensic accountant — can lead the investigation, and establish the appropriate parameters and the type of evidence needed to successfully prosecute. This type of professional can also offer recommendations on how to prevent new fraud incidents through enhanced controls.

Stopping fraudsters in their tracks

A lot has changed in the business world since early 2020. As you navigate novel challenges, don’t forget to keep fraud prevention top of mind. The knowledgeable CPAs at Magone & Company can lend our fraud protection expertise to help your business remain unscathed. Give us a call today at (973) 301-2300.

4 Common Filing Mistakes That Can Land You on the IRS Radar

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Planning to tackle your own tax returns in April? It may seem like a good idea for individual taxpayers, but mistakes happen — and they can be expensive. Even the best tax software can’t eliminate potential human error.

If you’re preparing to file your own return, take a second (or third) look to be sure you’re not guilty of making the four most common tax return mistakes.

  1. Transposed numbers. If the Form 1099 you receive shows $6,300 in income, and you inadvertently enter $3,600 instead, the IRS may interpret it as an attempt to dodge taxes. At best, transposing numbers will slow down your refund and raise red flags. At worst, it could trigger an audit. Be sure to verify every number you enter to ensure accuracy. Your tax software can tell you if your numbers don’t add up, but it can’t catch transposed figures.
  2. Misspelled names. It’s easy to misspell a name when entering dependent information, but doing so could cause real problems with your return. Double-check the names, ages and Social Security numbers of all dependents before submitting your return.
  3. Missing Social Security numbers. Don’t assume that your tax prep software will automatically populate your Social Security number. By checking for any missing information before filing your return, you can save yourself easily avoided IRS headaches later on.
  4. Not reporting all your income or taking too many deductions. It’s important to keep track of all your income and report it to the IRS correctly — not just your W2 wages. Remember, as a taxpayer, it’s your job to be honest and file returns correctly. If you alter a few numbers to get an extra deduction or write-off, the IRS will eventually catch up with you.

Don’t let past mistakes derail your finances

Whether there’s an error on your latest tax return or you have years of unfiled taxes, reach out to the tax specialists at Magone & Company. Call us today at (973) 301-2300 to schedule a confidential, no-obligation consultation.

Child Tax Credit Confusion: Use IRS Tools to Set the Record Straight

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To help working parents overcome the financial challenges brought on by the pandemic, the American Rescue Plan expanded the Child Tax Credit (CTC) to provide relief to more families than ever before. For tax year 2021, the CTC increased from $2,000 per qualifying child to:

  • $3,600 for children ages five and under at the end of 2021
  • $3,000 for children ages six through 17 at the end of 2021

Eligible families started receiving monthly automated payments of $250 or $300 per child on July 15th, without having to take any action. But some still haven’t received a credit, and you may be wondering if you’re missing out on money you deserve.

Am I qualified?

The rules are complex. According to the IRS, to qualify for advance payments of the CTC, you (and your spouse, if you filed a joint return) must have:

  • Filed a 2019 or 2020 tax return and claimed the CTC on the return

OR

  • Provided your information in 2020 to receive the Economic Impact Payment with the Non-Filers: Enter Payment Info Here tool

OR

  • Provided your information in 2021 with the Non-Filer: Submit Your Information tool

Additionally, you must meet these qualifying conditions:

  • Lived in a primary residence in the United States for more than half the year (the 50 states and the District of Columbia) or filed a joint return with a spouse who has a primary residence in the U.S. for more than half the year
  • Have a qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number
  • Made less than certain income limits. The CTC may be reduced to $2,000 total per child (or phased out completely) if your modified adjusted gross income (MAGI) in 2021 exceeds:
  • $150,000 for married taxpayers filing jointly and qualifying widows/widowers
  • $112,500 for heads of household
  • $75,000 for other individual taxpayers

Who is a qualifying child?

For 2021, a qualifying child is defined as one who is under age 18 whom the taxpayer can claim as a dependent. (In other words, it’s a child related to the taxpayer who generally lived with the taxpayer for at least six months during the year.) The child must also be a U.S. citizen or national, or a U.S. resident.

Clear the confusion

If you’re among the unsure, the IRS recently launched a new online tool — the Advance Child Tax Credit Eligibility Assistant — that can help you determine if you qualify for the CTC and the monthly advance payments. This tool is particularly useful if your family doesn’t normally file a federal tax return.

Once eligibility is determined, you can take the next step and register for the CTC payments using the Non-Filer Sign-up tool. And for your convenience, the Child Tax Credit Update portal allows you to view information about payments and opt out of receiving payments if you wish.

Ask a CPA

If you have any questions regarding your previous tax returns or eligibility, don’t hesitate to reach out to the professionals at Magone & Company.