In Volume 3 of our 2013 newsletter, we highlight:
- Not-For-Profit Donated Services
- Need For Trusts
- Household Help – “Nanny Tax”
- Recreational Marijuana
Not-For-Profit Donated Services
By Rob Peterson, CPA
There are several types of not-for-profits but all organizations normally prepare three basic financial statements: the statement of financial position, the statement of activities, and the statement of cash flows. The American Institute of Certified Public Accountants has identified several common mistakes in the financial statements.
Most of the mistakes occur on the statement of activities. We want to focus on one error that seems to cause the most problems for not-for-profit organizations. When to recognize donated services as income and the related expense and when do you not recognize them.
Generally, contributions of services are not recognized as income. The key word here is “generally”, which implies there is an exception to the rule. The exception to this rule is if the contributed services:
- Create or enhance nonfinancial assets.
- Require specialized skills that are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donations.
Let us look at a couple of examples:
Example one — The organization has a board member that is an accountant. This individual donates his time to do the bookkeeping, tracking of contributors with donations over $5,000, prepares the organization’s Form 990, and assists with the annual financial statement audit. Should the organization recognize this as income and then an equal amount for the expense? Yes, because this service required specialized skills, was provided by an individual possessing those skills, and would have typically been purchased.
Example two — Same organization, a doctor comes in on weekends and helps serve food in the kitchen to the organization’s clients. Should the organization recognize this as income and expense? No, because the service did not require specialized skill, would not have been purchased, and did not create or enhance nonfinancial assets. Even though it was performed by someone with specialized skills, the doctor was not performing a specialized skill.
Generally, not-for-profit organizations are not required to recognize the income and expense of services do-nated. The only time they are required to be reported is when the services donated are specialized skills and provided by an individual possessing those skills. If the organization is not sure if it should report the income, one simple question to ask is: “Would we have to purchase and pay for this service if they had not been do-nated?”
Need For Trusts
Trusts have been used as an integral part of sophisticated tax and financial arrangements for centuries. Exactly how they are used, however, depends on a person’s particular goals, current applicable tax rules, and other factors. We hope to give you a bit of general information about the current use of trusts to familiarize you with some of the things they might be able to accomplish for you as part of your overall tax, financial, and estate planning.
Simply stated, a trust is an arrangement in which legal title to property is held by one person who manages it for another’s benefit. A trust can be set up to benefit the person who created it (known as the grantor); it can be set up for beneficiaries named by that person, or both. Trusts can be set up to operate during the grantor’s life or can be set up to operate pursuant to the grantor’s will. They can be revocable (you can change your mind) or irrevocable. In short, trusts are very flexible entities that can be tailored to accomplish many purposes.
Among other things, trusts can:
- help you manage your property and investments more easily and expertly;
- help you avoid probate costs;
- keep life insurance proceeds out of your estate;
- protect the interests of your minor children;
- preserve an estate tax break for the amount of the unified estate and gift tax credit ($5.25 million in 2013);
- allow you to get the estate tax marital deduction for property that ultimately will go to other beneficiaries you name in your will; and
- let you get an income tax deduction for a contribution to a charity while you continue to get income from the contributed property and without having to immediately recognize capital gain.
The tax consequences are as varied as the uses to which trusts can be put. The creation of a trust for someone else’s benefit may be subject to gift tax, but the trust can be set up so that at least some contributions are gift-tax free. As far as income taxes go, trust income can be taxed to the grantor, the trust, or the beneficiary, depending upon how the trust is set up and what it is intended to do. Modest family income tax benefits may be achieved through the use of trusts, al-though in most situations income tax savings are no longer the main reason for using a trust. Estate tax may or may not be affected.
Finally, trusts, of course, need trustees. So that means deciding on a suitable trustee taking into account the type of trust involved. Sometimes the grantor can also serve as trustee. Or the trustee might be another family member, a friend, a professional adviser, or a financial institution.
We’ve only hit on some of the most basic aspects of trusts, but hope that we may have opened up some of the possibilities to you. Do not hesitate to call Jerry or Rita if you would like to discuss how trusts can be used to achieve your tax or financial goals.
Household Help – “Nanny Tax”
It is challenging enough to find the right person to care for your child in the home or to clean your home without having to worry about the tax complications of becoming a household employer. Al-though the rules have been liberalized in some ways, other requirements are just as stringent as they’ve always been. Also, be aware it is unlawful to knowingly hire or continue to employ an alien who cannot legally work in the United States. Here is a snapshot of what you must do to steer clear of trouble with the Internal Revenue Service when you hire someone to take care of your children in the home or other household help.
If you have household workers, you are required to withhold and pay Federal Insurance Contributions Act (FICA) taxes if cash wages paid in 2013 total $1,800 or more. As an employer, you must report and pay the required employment taxes for these domestic employees.
There is one limited FICA exception for wages paid to domestic employees who are under 18 (the so-called babysitter exception). Social Security and Medicare tax does not apply at all to these employees if domestic work is not their principal occupation. This exception may help with students who are evening and weekend babysitters.
You must pay the Federal Unemployment Tax Act (FUTA) for any household employee whom you pay $1,000 or more in a calendar quarter. The effective FUTA rate varies state-by-state. We can give you all the details.
The FICA and FUTA you owe for any household employee is computed on Schedule H (Household Employment Taxes) of Form 1040 and paid along with your regular income tax. Although you are not required to make estimated tax payments for FICA and FUTA, it might be a good idea to make quarterly payments to avoid winding up with an unexpectedly large bill at tax return time. Not paying the “nanny tax” is considered income tax evasion. Just because an employee tells you that they will take care of paying their own taxes does not relieve you of your reporting responsibility.
Thankfully, you are not required to withhold federal income tax from the wages of household employees even if the employees asks to have income tax withheld. But you are required to file a Form W-2 for every domestic employee whose wages are subject to the Social Security tax. You will need to get an Employer Identification Number for yourself; you cannot use your Social Security Number.
Some clients pay the household employee’s share of Social Security taxes in addition to their share. This payment must be added to the employee’s Form W-2 as wages.
There may be other tax complications as well. For example, many employers may have to file and pay state unemployment insurance tax for each quarter in which the state wage threshold is reached.
As you can see, the tax rules for household help are complex. We are in a position to advise you of the most efficient way to take care of all your tax responsibilities. Please call if we can be of assistance to you.
The U.S. Department of Transportation (DOT) issued a bulletin making it clear that state initiatives to legalize the “recreational” use of marijuana will not have an impact on U.S. DOT’s regulation about the use of mari-juana by transportation employees.
“We want to make it perfectly clear that the state initiatives will have no bearing on the U.S. DOT’s regulated drug testing program,” said Jim L. Swart, Director of the Office of Drug and Alcohol Policy and Compliance. “The U.S. DOT’s Drug and Alcohol Testing Regulation (49 CFR Part 40) does not authorize the use of Schedule I drugs, including marijuana, for any reason.”
In the 2012 election, voters in two states, Washington and Colorado, passed measures legalizing recreational use of marijuana for people ages 21 years or older.
According to the bulletin, even if a state passes a recreational marijuana initiative, Medical Review Officers (MRO) will not verify a drug test as negative based on learning that the employee used “recreational mari-juana.” U.S. DOT also reiterated that an MRO will not verify a drug test negative based on information that a physician recommended that the employee use “medical marijuana” when states have passed “medical mari-juana” laws.
For more information, please contact us.