We recently received a question about state unemployment tax, and I want to pass on Senior Tax Associate Carla Medrano’s answer in the interest of all readers. Here is the question:

“Are religious non-profits in the state of Texas exempt from state unemployment tax?  My experience is that non-profits [501(c)(3)s] are not exempt from state unemployment tax even if they are religious organizations.  An example might be a school that is a 501(c)(3), based on a particular denomination, but legally not part of a particular church or owned by a denomination.  (Churches are exempt from state unemployment in the state of Texas, correct?)”

Nonprofit organizations with a 501(c)(3) tax exemption are subject to state unemployment tax, unless they are a church or religious organization. In the example above, the school would be subject to paying state unemployment tax, but the church would not. From the Texas Workforce Commission:

The Texas Unemployment Compensation Act (TUCA) requires liable Texas employers – including sole proprietorships, partnerships, corporations, and other entities registered with the Secretary of State – to pay UI tax. Employers become liable if they:

• Pay at least $1,500 in wages in any one calendar quarter during the current or preceding calendar year, or
• Employ at least one worker for part of a day or more each week for 20 weeks during a year, or
• Acquires or otherwise receives, through any means, all or part of the organization, trade, business, or workforce of a subject employer, or
• Are a 501(c)(3) nonprofit organization (excluding churches and religious organizations) and have at least four employees for part of a day or more each week for 20 weeks, or
• Elect to become a subject employer, or
• Have Texas employees and are subject to the Federal Unemployment Tax Act (FUTA), or
• Are a state political subdivision or instrumentality, or
• Pay $1,000 or more wages one calendar quarter for domestic service, or
• Employs three (3) employees for 20 weeks in a calendar year or pays $6,250.00 in cash wages in a calendar quarter, or
• Employ a seasonal worker on a truck farm, orchard or vineyard, or
• Employ a migrant or a seasonal worker(s) who works for a farmer, ranch operator, or labor agent who employs migrant worker(s).

A current story in the online Nonprofit Times, Another bookkeeper, another arrest, brings perfect clarity to the reason organizations need to perform background checks. A bookkeeper was arrested for taking $200,000 in donations from her place of employment, a nonprofit organization, and depositing the money in her personal bank account. However, this was not a first offense. She has five prior arrests for various issues dating back to 2000. Obviously, the organization did not perform a background check.

Background checks satisfy two important principles of nonprofit organizations, including churches and ministries: internal controls and governance. Internal controls assure that your organization has checks and balances in place to maintain financial integrity. Governance is required by the board and governing officers to maintain the integrity of the organization as a whole. Background checks, if not already part of your standard hiring procedures, need to be included in your list of due diligence for potential employees.

The IRS’ standard business mileage rate for 2011 was 51 cents per mile for the first half of the year, and 55.5 cents per mile from July 1 through December 31. Many churches reimburse employees for number of miles driven using the IRS rate, but some choose to reimburse at rates higher or lower than the standard. It’s important to understand the differences to remain compliant with the IRS.

Employees must provide adequate logs or diaries to substantiate business miles and submit the records within a reasonable period of time.  This means at least every 60 days of incurring the expense if the employee is being reimbursed.  However, if the employee is given an advance, the records substantiating the expense should be provided at least every 30 days.  Adequate records include the date, place, business purpose and number of miles driven. Parking fees and tolls need to be reported separately.

If reimbursed at an amount greater than the IRS-approved rate: The excess amount reimbursed above the standard is subject to withholding tax and must be reported as income on the employee’s W-2 form.

If reimbursed at an amount less than the IRS standard: The employee is eligible for a business deduction for the difference in the IRS standard and the amount reimbursed.

If employees do not provide adequate records within 60 days, then the church must report the reimbursement as income to the employee. The employee is eligible to claim a business expense deduction on their personal return for the business miles driven, if adequate records can substantiate the mileage.

As a reminder, employee business expenses are deductible only if they exceed 2% of the employee’s adjusted gross income.

Other mileage rates for 2011:

-         Medical purposes and moving: 19 cents/mile (2.5 cents more than in 2010)

-         Charitable mileage deduction (unreimbursed miles while driving for a church or charity): 14 cents/mile (unchanged)

Churches need to be aware of unrelated business income tax (UBIT). Here’s some information about UBIT related to real estate, such as rental income from church-owned property.

One of our accountants, Lisa Potter, works extensively with nonprofit organizations. Her blog post, Maintaining transparency beyond the Form 990, has application for churches and ministries, even though the Form 990 is not required.

From my colleague, Lisa Potter:

Donor relationships and engagement are a high priority for our nonprofit clients. The United States Postal Service is offering a 3% postage discount for July and August, 2011 when mobile marketing and direct mail are combined. Here’s how it works: organizations print mail pieces (envelope or contents) with a QR code (Quick Response code – a two-dimensional code that users can scan with a mobile device that takes them directly to a specified landing page on a smartphone). The qualifying First Class Mail® cards, letters and flats, and Standard Mail® letters and flats bearing a QR code will receive a 3% discount on the total postage cost.

Promotion guidelines:

-         The QR code must be used for consumer interaction and be relevant to the mail piece. The two-dimensional barcode must have a marketing purpose, not administrative (such as links to online payment or internal operations) or educational.

-         Co-mingled, co-mailed and combined mailings are allowed, but the QR-coded mail must have a separate postage statement.

-         The QR code 3% promotional discount cannot be combined with any other postal incentive, except the full-service Intelligent Mail® barcode discount.

-         Effective dates for the promotion are July 1 – August 31, 2011.

For nonprofit organizations with an online presence, the USPS mail promotion can add up to worthwhile savings to connect with donors and potential donors.

Even if your organization doesn’t file a Form 990, you may be eligible for the health care insurance small employer credit under the new Healthcare law. Nonprofit organizations, including churches and ministries, can receive up to 25% of paid healthcare premiums back into the organization as a refund on Form 990-T.

Here’s what you need to do:
If you are a tax-exempt employer filing Form 990-T ONLY to request a credit on form 8941 (Credit for Small Employer Health Insurance Premiums), you must complete the following portions of Form 990-T:

1) Complete the heading at the top of page 1 (before Part I), except for items E, H and I.
2) Enter “0” on line 13, column (A), line 34, and line 43.
3) Enter the credit from line 25 of Form 8941 on line 44f
4) Complete line 45, 48, 49
5) Write “REQUEST FOR 45R CREDIT ONLY” on the top of the Form 990-T
6) Complete the signature area. Must be signed and dated by an authorized officer of the organization.
7) Attach Form 8941 to the 990-T before filing.

Form 990-T is normally only required if an organization has $1,000 or more in UBTI (unrelated business taxable income). You will not be required to complete the 990-T in future years unless you meet the gross UBTI threshold –or- wish to take advantage of another refundable credit.

One important thing to remember is to carefully go through the computation of FTE (full-time equivalent) employee per Form 8941 instructions. In our experience, this is the calculation that reduces the credit for most of our clients. If the FTE is computed incorrectly, you may initially receive a refund for more than you’re entitled, which may generate a notice for repayment from the IRS in a later year.

My colleague, Lisa Potter, wrote part 2 of 2 for in-kind donations for her blog, www.990taxhelp.com. Many of the issues she discusses for nonprofit organizations also apply to churches and ministries.

Read In-kind donations, part 2 of 2.

We get a lot of questions about the tax ramifications of in-kind donations (contributions other than cash). There are two basic types of in-kind donations:

Services (use of materials, equipment, facilities, etc.) -Examples of in-kind services are accounting or legal services, discounted or free rent of facilities, etc.
Goods – Tangible items that are donated to you, such as furniture, stock, etc.

For tax purposes, you’ll need to determine the fair market value (FMV) of the donated goods or services. You may use any reasonable method to determine FMV of the goods & services provided to the donor, as long as the method is applied in Good Faith. Here are a few ways to determine FMV:

Inventory – Value can be obtained from published catalogs, vendors, independent appraisals or other reasonable sources.
Depreciable assets (e.g. furniture, etc.) – These should be recorded at their fair values as of the date of the contribution. What do comparable items sell for at consignment stores?
Services – Use what the donor would normally charge for the services provided.

In-kind gifts that can be used or sold should be recognized on the financial statements at their FMV. If these gifts cannot be used by the church/ministry or sold, they have no value and should not be recognized as assets or contributions.

If an in-kind contribution is to be used for fundraising purposes, such as tickets, gift certificates, or merchandise for an auction, these items should be recorded as a contribution, at the item’s FMV. Any difference between the item’s recorded fair value and the ultimate amount received for the item should be recognized as an adjustment to the original contribution amount.

Next time, I’ll address more details about contributed services and a form you need to know about regarding in-kind donations.

In this country (and therefore the State of Texas), property is owned by the people – even if some of it is managed, administered, etc. by national, state, and/or local governments.

However, when the rightful owner can’t be found, the property is supposed to be escheated to the government to hold in trust until the rightful owner is located. If this owner is found, the government gives the property to them. If they aren’t found, then the government (as trustee) sells the asset to another private owner. Read the rest of this entry »