While there are many tax issues that nonprofits must be aware of, these four are often misunderstood or overlooked. Between unusual circumstances and foreign income tax, how many of these tax matters does your nonprofit face?
Line Items
Recent updates from the IRS may be to your organization’s advantage.
- IRS Announcement 2021-7 states that amounts paid for hand sanitizer, sanitizing wipes, personal protective equipment and masks by the taxpayer may be treated as paid for medical care under Sec. 213 (d). That’s if these expenses were incurred primarily to prevent the spread of COVID-19. If your organization purchased this equipment, IRS 2021-7 may apply. Unreimbursed amounts are deductible as an itemized medical expense to the extent that, along with other allowable medical expenses, they exceed 7.5% of adjusted gross income. Or they may be paid for or reimbursed from a health savings account. Check to see if your organization’s Group Medical Plan has been amended to also cover protective and sanitizing equipment.
- The IRS also posted COVID Tax Tips which guides employers through how to pay for their portion of Social Security tax of certain employees that were deferred from Sept. 1, 2020, through Dec. 31, 2020. This information supersedes Notice 2020-65 and Notice 2021-11. According to the latest update from the IRS, employers can make the deferred payments through the Electronic Federal Tax Payment System (EFTPS) or by credit or debit card, money order, or check. The IRS asked that employers separate these payments from other tax payments and promised that an option for ‘deferral payment’ would be added to the EFTPS system to make it easier to identify the tax payment as one for the deferred Social Security tax.
T.D. 9940 issued by the IRS provides helpful information on how to correct tax funds that are misdirected or direct deposited to the wrong bank account. The procedures are mandated in Sec. 6402(n) in the Taxpayer First Act, P.L. 116-25.
Key takeaway: Nonprofits may be able to deduct the cost of sanitizing supplies to combat COVID. Guidelines are also out now to help employers pay their portion of deferred Social Security.
Charitable Bequests
For those organizations that receive charitable bequests, it is worth noting that the Tax Court has examined the issues of charitable bequests; it redetermined the value for gift and estate tax purposes of interests in limited liability companies (LLCs) holding real estate, ground leases, and leased-fee interests. The court upheld the IRS’s determination that a discount applied to property should be split between two charitable donees. The case that the court ruled on may be read in full in Tax Bulletin 2021-17.
Key takeaway: Nonprofits should check with their accountants regarding charitable bequests, especially if they involve real estate.
Gambling Losses
In another update, the Tax Court recently ruled that a taxpayer sufficiently substantiated gambling losses of at least as much as gambling winning reported for the year.
The case that brought about this ruling centered on John Coleman, an insurance agent whose compulsive gambling offset his earnings as an agent. Despite gambling winnings in excess of $350,00 in 2014, Coleman failed to file his income taxes. Typically, taxpayers who do not gamble for their trade may itemize their deductions to including gambling losses, to the extent of any gambling winnings.
Coleman, through a detailed retrace of his receipts and expert testimony, presented his evidence. The court found reasonable evidence to support Coleman’s substantiation of his losses. (The complete case may be read at TC 2020-146.)
Key takeaway: Records from the casinos, plus expert evidence on the probability of slot machines, were upheld by the court as evidence in a tax-related case. Casinos should take note that their records of patron activities might be called upon to substantiate an IRS filing.
Should You Opt-In for a PIN?
PIN numbers are ubiquitous. You’ve probably used a person identification number (PIN) in the last week or two to access your bank account or conduct other secure transactions.
Now, the IRS is offering taxpayers the option of using PINS to verify their identity online. The program is voluntary and allows taxpayers to opt-in to receive a PIN to prevent identity theft.
Key takeaway: The FTC stated that in 2020, over 167,000 people reported identity theft. It’s a continuing problem. If you were the victim of identity theft, it may be a good idea to request an IRS PIN. Or, if you feel like your organization may be open to tax refund or identity theft, talk to your tax preparer about requesting a PIN.
Keeping up-to-date with tax changes can be challenging, but following this blog makes it much easier. We hope you’ll bookmark our site to watch for future updates.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.
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